IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL COURT
LIST C
Not Restricted
S CI 2012 02700
NORTH EAST SOLUTION PTY LTD (ACN 129 466 851)
Plaintiff
v
MASTERS HOME IMPROVEMENT AUSTRALIA PTY LTD
(FORMERLY SHELLBELT PTY LTD) (ABN 21 066 891 307)
First Defendant
and
WOOLWORTHS LIMITED (ABN 88 000 014 675)
Second Defendant
---
JUDGE:
CROFT J
WHERE HELD:
Melbourne
DATE OF HEARING:
18–21 May, 25–28 May, 1–4 June, 17–18 August and 16–17
September 2015
28 January 2016
DATE OF JUDGMENT:
CASE MAY BE CITED AS:
North East Solution Pty Ltd v Masters Home Improvement
Australia Pty Ltd
MEDIUM NEUTRAL CITATION:
[2016] VSC 1
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CONTRACT – Good faith – Enforceability of agreement to negotiate in good faith – Breach
of obligation to act reasonably and in good faith – Relationship between obligation to act
“reasonably” and obligation to act “in good faith” – Burger King Corporation v Hungry Jack’s
Pty Ltd (2001) 69 NSWLR 558 – Construction of commercial contracts – Terms implied in
order to give business efficacy to agreement – Incorporation of terms of earlier agreement
into subsequent agreement – Different named parties in subsequent agreement.
DAMAGES – Quantification of loss and damage – Lost opportunity to develop and lease
land – Date at which damages are assessed – Capitalisation of Income method of valuation
not the most appropriate method of estimating loss and damage – Discounted Cash Flow
method of valuation – Sellars discount – Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.
---
APPEARANCES:
Counsel
Solicitors
For the Plaintiff
P.J. Bick QC with
B. Gibson
Tisher Liner FC Law
For the Defendants
P.D. Crutchfield QC with
N. McAteer
Minter Ellison
TABLE OF CONTENTS
Introduction ......................................................................................................................................... 1
Evidence ............................................................................................................................................... 3
Approach to the evidence ................................................................................................................. 5
Agreements between the parties ..................................................................................................... 7
Contractual framework ................................................................................................................... 16
Letter of Offer ........................................................................................................ 16
Agreement for Lease ............................................................................................ 23
Nature and effect of contractual obligations .............................................................................. 35
Factual issues..................................................................................................................................... 58
Letter of Offer ..................................................................................................................... 58
Costing of generic design briefs ...................................................................................... 59
Agreement for Lease ......................................................................................................... 61
Events preceding negotiation of Landlord’s Works Costs .......................................... 61
Discussions regarding Masters’ contribution to Landlord’s Works Costs ............... 67
The 22 April 2010 meeting.............................................................................................. 106
Events after 22 April 2010............................................................................................... 119
Plaintiff’s allegations of breach................................................................................................... 121
Woolworths did not act reasonably to identify and resolve any differences ......... 127
Role of Vaughan Constructions ..................................................................................... 136
Woolworths did not act in good faith to identify and resolve any differences ...... 146
Woolworths’ unwillingness to engage with NES .......................................... 146
The effect of Woolworths’ undisclosed budget ............................................. 148
Other matters affecting Woolworths’ performance of its obligations ..................... 151
Pursuit of the Hume & Iser site ........................................................................ 151
Other considerations .......................................................................................... 159
Greater Bendigo City Council opposition ...................................................... 159
Financial position of NES .................................................................................. 161
Agreement for Lease terminated by Woolworths for reasons not contemplated by
its terms ................................................................................................................. 164
Conclusion in relation to liability ............................................................................................... 168
Loss and damage ............................................................................................................................ 173
Applicable principles ...................................................................................................... 173
What was the opportunity lost by NES? ...................................................................... 180
Would NES have acted on the opportunity had it been offered? ............................ 183
Did the opportunity have some (not negligible) value? ............................................ 185
Would agreement have been reached in relation to the Landlord’s Works Costs?186
Would Bendigo Bank have funded the development? .............................................. 188
Would flood inundation issues have prevented the development? ........................ 200
Would the requisite planning approvals have been obtained? ................................ 208
Would NES have realised the opportunity to develop and lease the Bendigo site?219
Quantification of loss .................................................................................................................... 221
If NES has lost a valuable opportunity, what was that opportunity worth? .......... 221
Valuing the lost opportunity.......................................................................................... 222
i
Appropriate methodology for assessing value of lost opportunity ......................... 222
Cash flow methodology.................................................................................................. 224
Comparison of cash flows ................................................................................. 224
Valuing the cash flows that would have been achieved ............................................ 225
The Discounted Cash Flow method .............................................................................. 226
The Capitalisation of Income method .......................................................................... 229
The validity of the Discounted Cash Flow method for valuing the cash flows ..... 231
The application of the Discounted Cash Flow method .............................................. 233
Valuing the cash flows together as at the date of completion .................................. 234
Issues with valuing cash flows as at the date of completion .................................... 235
The evidence of Ms Wright and Mr Jackson on valuation ........................................ 239
The appropriate yield...................................................................................................... 244
What date should be used when determining the applicable yield? ....................... 244
The yield selected by Mr Jackson .................................................................................. 248
Conclusion: value of the lost opportunity ................................................................................. 252
Discount to reflect risks ................................................................................................................ 253
Orders ............................................................................................................................................... 255
ii
HIS HONOUR:
Introduction
1
In broad terms, this case concerns agreements and dealings between the Plaintiff,
North East Solution Pty Ltd (“NES”), and the Defendants, Masters Home
Improvement
Australia
Pty
Ltd
(“Masters”)
and
Woolworths
Limited
(“Woolworths”), with respect to the development of what is described as a Masters
store at Strathdale, a suburb of Bendigo. The actual site of the proposed Masters
store is at 195 McIvor Road, Bendigo, which, for convenience, is referred to as “the
Strathdale site” or “the Bendigo site”. Also, for convenience—unless a distinction
needs to be drawn in a particular context—“Masters and Woolworths” are referred
to as “Woolworths”.1 Also, for the sake of clarity, it should be noted that a reference
to “Oxygen”, an “Oxygen store”, “Project Oxygen” and the like is a reference to
Masters, a Masters store or the Masters stores rollout by Woolworths, respectively.
2
The broader context of the proposals for the development of a Masters store at the
Strathdale site was the development by Woolworths of the Masters store brand to
compete with the Bunnings chain of hardware stores nationally. As is discussed in
further detail in these reasons, the intention was to roll out the Masters stores
nationally very quickly in competition with Bunnings. In a major development of
this kind, one might normally expect detailed design briefs, agreements for lease,
and lease and building contracts.
However, in the circumstances affecting the
present case, the time constraints Woolworths saw as imposed on the Masters rollout
meant that arrangements and agreements needed to move far more quickly than
might usually be the case.
So, again in broad terms, Woolworths adopted the
approach of agreeing to contribute the difference between the estimated cost of
building a Bunnings store on a particular site and the cost of building a Masters store
on that site.
The difference arose—the Masters store development being more
expensive—as a result of the view taken that there would be a marked advantage in
enhancing the Masters store premises by, for example, providing concrete, rather
than metal side walls and some other features.
1
SC:KS
It was thought that these
References in the evidence to “WOW” should be read as referring to “Woolworths”.
1
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
enhancements would be more attractive to potential customers, particularly female
customers. A reader of these reasons might, in light of extensive coverage recently
in the financial and other business press, have some thoughts about this strategy. I
mention this coverage in this context to emphasise whether or not such a business
strategy is or is likely to be successful is not a matter relevant to these proceedings
and is not a matter with which the Court has had or should have regard. The
assessment of the position of the parties in these proceedings is based entirely on the
evidence before the Court, written and oral; evidence which does not include these
recent press reports.
3
The case concerns the nature and extent of contractual obligations between the
parties with respect to the development of and leasing of the Strathdale site for the
Masters store. More particularly, but nevertheless in general terms, a critical issue in
this context is the nature and extent of the obligations of the parties to act reasonably
and in good faith in pursuing their agreement with respect to the development.
4
The agreement between the parties with respect to the Strathdale site development
was the subject of a Letter of Offer which effected a binding agreement between the
parties by 2 June 2009 (“the Letter of Offer”)2 and an agreement for lease which was
executed on 24 February 2010 (“the Agreement for Lease”).3
5
In substance, these agreements provided that NES would develop a Masters Home
Improvement store for Woolworths at the Strathdale site and, once it had been
developed, Masters would lease that store from NES for a period of 12 years with
options for a further five terms of six years each.
6
These agreements were binding on the parties and, relevantly to these proceedings,
could only be terminated if the parties, acting reasonably and in good faith, were
unable to resolve any disagreement that arose in relation to the construction costs,
specifically a Landlord’s Works Costs amount and Masters’ contribution to that
amount. The precise terms of these agreements and the extent of these obligations is
2
3
SC:KS
Court Book 1039.
Court Book 2939.
2
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
discussed in detail in the reasons which follow. It is common ground in these
proceedings that in May 2010, Woolworths purported to terminate the agreements
on the basis that the parties could not resolve disagreements in relation to the
Landlord’s Works Costs and the Masters contribution.
7
The gravamen of the NES case is its contention that there was no genuine
disagreement in relation to the calculation of the Landlord’s Works Costs or, if there
was such a disagreement, Woolworths had not acted reasonably or in good faith to
resolve it. NES contends, instead, that Woolworths terminated the agreement for
other reasons. It is said that these reasons included construction costs exceeding an
undisclosed budget (a budget which Woolworths kept to itself), a desire to purchase
an alternative site in Bendigo, perceived opposition from the Greater Bendigo City
Council (“the Council”) and residents, and perceived funding issues affecting NES.
None of these grounds, NES contends, entitled Masters or Woolworths to terminate
the Agreement for Lease according to its terms.
8
Woolworths, on the other hand, contend that this case concerns a contractual
obligation as between two sophisticated commercial parties (apparently treating
Masters and Woolworths as one) to act reasonably and in good faith in attempting to
agree commercial terms to form part of an agreement for lease. The commercial
terms to be agreed were, it is said, the Landlord’s Works Costs, the amount that
Masters must contribute (being the Masters contribution), and the manner in which
such a contribution would be made. Woolworths deny that there was any failure to
comply with its obligations under the agreements, and observe—as a truism—that
the fact that the parties did not reach agreement on these commercial terms is not
evidence of any such failure. Rather, it is contended that for NES to succeed in its
case, it must identify a course of conduct on the part of the Defendants, Masters and
Woolworths, in relevant negotiations, which offends conscience or is otherwise
wholly unreasonable given the relevant circumstances and context.
Evidence
9
SC:KS
A number of individuals gave evidence in these proceedings, including the
3
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
following:
(a)
Mr Andrew Thomas Biacsi, Director of Contour Consultants Australia Pty
Ltd;
(b)
Mr Brendan Edward Blake, Property Developer and sole director of the
Plaintiff;
(c)
Mr Richard Charles Douglas Champion, National Property Manager at
Woolworths;
(d)
Mr Gerald Peter Davis, Senior Associate at Blackstone Waterhouse Zouki
Lawyers (formerly a Lawyer at Fetter Gdanski);
(e)
Mr Michael David Fetter, Principal Lawyer at Tisher Liner FC Law (formerly
a Partner of Fetter Gdanski);
(f)
Mr Michael Joseph Graves, Partner of Allens;
(g)
Mr Grant Andrew Jackson, CEO of m3property;
(h)
Mr Timothy Stuart Macmillan, Group Property Operations Manager—South
at Woolworths;
(i)
Mr Ewen Kenneth McDonald, Director of Rider Levett Bucknall;4
(j)
Mr Andrew Maxwell McGregor, Business Banking Manager at Bendigo Bank;
(k)
Mr
Stuart
Andrew
McGurn,
Partner
of
Environmental
Resources
Management Australia Pty Ltd;
(l)
Mr Trevor Ernest Stockwell, Senior Partner of MCP Group (Bendigo)
(formerly National Manager for Complex Business, and Regional Credit
Manager at Bendigo Bank);
4
SC:KS
In these reasons, for convenience, the firm Rider Levett Bucknall is referred to as “Rider Hunt”. In the
evidence, it is variously referred to as “Rider Levett Bucknall”, “RLB”, “Riders” and “Rider Hunt”.
4
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(m)
Mr Owain Stone, Partner of KordaMentha;5
(n)
Mr Grant David Sutherland, Director of Sutherland Farrelly Pty Ltd;
(o)
Mr Peter John Svanosio, Director of Jacanne Pty Ltd, the owner of blocks of
land located at 195, 197 and 199 McIvor Road, Strathdale;6
(p)
Mr Christopher Ronald Thomas, Principal Hydrologist, Environment & Water
Resources at WorleyParsons;
(q)
Mr Steven Craig Troon, Managing Director of H. Troon Pty Ltd (“Troons”);
and
(r)
Ms Dawna Kathleen Wright, Senior Managing Director at FTI Consulting.
Approach to the evidence
10
In the course of proceedings, Woolworths emphasised a number of times that the
Court should be wary of oral evidence as to events around five years ago,
particularly from witnesses who have or may have an interest in the outcome of the
proceedings. I did not take this submission to be the casting of aspersions on any
individuals, but rather, a submission seeking to draw upon what might be said to be
the realities of human recollection in particular circumstances.
The point
emphasised by Woolworths is that evidence provided by contemporaneous
documents should be given great weight and relied upon unless there is compelling
unambiguous oral evidence to the contrary. I did not take NES to be arguing to the
contrary, at least in general principle, but, of course, the parties differed to the extent
that oral evidence might be given greater weight.
11
In any event, these submissions and the nature of the issues raised in this case led
me to mention to the parties the decision of Lewison J (as his Lordship then was) in
the Chancery Division in Foodco Uk LLP v Henry Boot Developments Ltd, where issues
5
6
SC:KS
Expert Report of Owain Stone (1 May 2015) and Expert Report of Owain Stone (22 May 2015) were
tendered by consent, without the need for Mr Stone to be called: Transcript 543.
Outline of Evidence in Reply of Peter John Svanosio (17 March 2015) was tendered by consent, without the
need for Mr Svanosio to be called: Transcript 519.
5
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
arose with respect to evidence as to conversations between parties and the weight
that might be given to that evidence as distinct from evidence provided by
contemporaneous written documents.7 Thus, his Lordship said:8
3.
The burden of proof lies on the tenants to establish their case. They
must persuade me that it is more probable than not that Henry Boot
made fraudulent misrepresentations. Although the standard of proof
is the same in every civil case, where fraud is alleged cogent evidence
is needed to prove it, because the evidence must overcome the
inherent improbability that people act dishonestly rather than
carelessly. On the other hand inherent probabilities must be assessed
in the light of the actual circumstances of the case.
4.
Although some of the representations on which the tenants rely were
made in writing, in all cases they allege that these representations
were confirmed, expanded, or supplemented by oral representations.
These oral representations were made in conversations and at
meetings of which there is scant record. In approaching the evidence I
have tended to place weight on contemporaneous documents and
documents which came into existence before the problems emerged.
In assessing the recollections of witnesses, it is also important to avoid
the benefit of hindsight. I must try to assess what people did, said and
thought at the time. In that connection I have borne in mind the
words of Lord Pearce in his dissenting speech in:9
Credibility involves wider problems than mere “demeanour”
which is mostly concerned with whether the witness appears to be
telling the truth as he now believes it to be. Credibility covers the
following problems. First, is the witness a truthful or untruthful
person? Secondly, is he, though a truthful person, telling
something less than the truth on this issue, or, though an
untruthful person, telling the truth on this issue? Thirdly, though
he is a truthful person telling the truth as he sees it, did he register
the intentions of the conversation correctly and, if so, has his
memory correctly retained them? Also, has his recollection been
subsequently altered by unconscious bias or wishful thinking or
by overmuch discussion of it with others? Witnesses, especially
those who are emotional, who think that they are morally in the
right, tend very easily and unconsciously to conjure up a legal
right that did not exist. It is a truism, often used in accident cases,
that with every day that passes the memory becomes fainter and
the imagination becomes more active. For that reason a witness,
however honest, rarely persuades a Judge that his present
recollection is preferable to that which was taken down in writing
immediately after the accident occurred. Therefore, contemporary
documents are always of the utmost importance. And lastly,
although the honest witness believes he heard or saw this or that,
is it so improbable that it is on balance more likely that he was
7
8
9
SC:KS
[2010] EWHC 358 (Ch).
Foodco Uk LLP v Henry Boot Developments Ltd [2010] EWHC 358 (Ch), [3]–[5] (citations omitted) (“the
Henry Boot case”).
Onassis v Vergottis [1968] 2 Lloyd's Rep 403 at 431.
6
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
mistaken? On this point it is essential that the balance of
probability is put correctly into the scales in weighing the
credibility of a witness, and motive is one aspect of probability.
All these problems compendiously are entailed when a Judge
assesses the credibility of a witness; they are all part of one judicial
process and in the process contemporary documents and admitted
or incontrovertible facts and probabilities must play their proper
part.
5.
12
None of the witnesses had a good recollection of precisely what was
said by them or to them in the course of meetings or telephone
conversations.
Some were clearly reconstructing what, with
hindsight, they thought must have happened. I do not, however,
consider that any of the witnesses I heard were deliberately giving
untruthful evidence. All were doing their honest best.
In my view, the approach to the evidence as adopted by Lewison J in the Henry Boot
case is appropriately applied in the present circumstances. I do, however, make the
obvious point that the facts and circumstances before the court in the Henry Boot case
were quite different from those before the Court in the present proceedings and
there was no suggestion in these proceedings that issues of fraud arise, whether by
fraudulent misrepresentations or otherwise. Nevertheless, this does not affect the
approach to the evidence to be applied.
Agreements between the parties
13
The agreements between the parties were, as indicated, constituted by the Letter of
Offer and the Agreement for Lease.
14
For present purposes, the critical provisions of the Letter of Offer are as follows:10
Re:
Proposed Woolworths Hardware (Home Improvement) Store
195 McIvor Road, Strathdale
Further to our discussions last week regarding the potential for a Woolworths
hardware store at 195 McIvor Road, Strathdale, Woolworths are pleased to
provide the following terms and conditions that Woolworths would be
willing to enter into an Agreement for Lease and Lease with the Maxi Foods
Group for the abovementioned premises, subject to Woolworths Board
Approval.
1.
Premises
This offer is based on the attached plan (Reference Sketch Design Site Plan –
Option 1: SK01 dated 13 May 2009) and the latest discussions and
10
SC:KS
Court Book 1039.
7
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
information. In the event of further amendments, redesigns and changes to
configuration, Woolworths reserves its right to amend this offer.
2.
Lease Area
The total estimated area for the hardware store is 10,535 square metres on a
site area of 24,700 square metres (subject to survey).
3.
Lessee
Woolworths Limited (ABN 88 000 014 675)
4.
Lessor
Maxi Foods Group
…
13.
Design Brief
A design brief will be issued in due course which will contain Woolworths’
current standard Specification. The Landlord is to provide a turn-key
premises in accordance with the obligations contained in the Specification.
Should the design brief differ in cost to other major trade supply/restricted
retail premises (full height precast brief), the difference in cost is to be made
by payment as a lump sum. Rider Hunt quantity surveyors, are to verify the
cost difference.
14.
Programming
The Landlord must provide a development program acceptable to
Woolworths, which specifies the date of handover following practical
completion, for inclusion in the Agreement for Lease. The Landlord must
comply with the construction program, with a normal industry allowance for
delays.
Woolworths is not obliged to open the store prior to 1 July 2011.
15.
Fitout Period
Following the practical completion of works as detailed in the Specification,
Woolworths will require a period of 12 weeks to fitout the store prior to
opening. The Landlord is to provide uninterrupted access to the Premises for
this purpose.
16.
Conduct of Works, Schedule of Finishes and Scope of Works
The Landlord must conduct works on site to a high standard. The Landlord
will document the project fully and provide all necessary details, contractual
clauses and condition precedents regarding the development of the site.
In particular, documents covering Schedule of Finishes and Scope of Works,
together with an appropriate Landlord’s Drawing Transmittal schedule, all
satisfactory to Woolworths, will be required for inclusion in the Agreement
for Lease.
SC:KS
8
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
We look forward to the opportunity to collaborate throughout the design
phase and to review detailed plans so as to provide our comments on issues
including trolley access, sight-lines, services, dock areas, car parking, internal
vehicle circulation, lighting, customer access, public safety and customer
amenities.
The final plans and specifications for the development are to be to
Woolworths’ satisfaction.
…
21.
Documentation & Approvals
This offer is subject to:
1. Finalisation of development plans, programming, condition
precedents regarding the development, Scope of Works and finishes
to Woolworths’ satisfaction;
2. Maxi Foods Group gaining control of all the land on the site in order
to undertake the development; and
3. Approval of Woolworths Board.
Approvals by the Woolworths Board, will be operative for a period of 12
months.
If formal documentation is not executed within that time,
Woolworths can elect to terminate the agreement and withdraw from the
project.
…
24.
Binding Agreement
Although it is intended that a formal agreement for lease will be executed
based on the Woolworths standard documentation, including the commercial
terms in this letter, it is intended that acceptance by you of the terms and
conditions in this letter will create a binding agreement between you and
Woolworths.
The letter was signed on behalf of Woolworths by Mr Macmillan as its Senior
Development Manager and by Mr Blake on behalf of Maxi Foods Group and is dated
2 June 2009.
15
In the present context, the critical provisions of the Agreement for Lease are as
follows:11
Parties
1.
11
SC:KS
North East Solution Pty Ltd (ACN 129 466 851) of 17 Hargraves
Street, Castlemaine VIC 3450 (the Landlord);
Court Book 2939.
9
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
2.
Shellbelt Pty Limited (ABN 21 066 891 307) of 1 Woolworths Way,
Bella Vista NSW 2153 (the Tenant); and
3.
Woolworths Limited (ABN 88 000 014 675) of 1 Woolworths Way,
Bella Vista NSW 2153 (the Guarantor).
Recitals
A
The Landlord is, or will be entitled to be, the registered owner of
the Land.
B
The Landlord proposes to undertake the Landlord’s Works.
C
The Landlord has agreed to grant and the Tenant has agreed to
take the Lease of the Premises, subject to the terms and conditions
in this Agreement.
1.
Interpretation
1.1
Definitions
The following definitions, together with those in the Reference
Schedule, apply unless the context otherwise requires.
…
Briefing Kit means the specification briefing kit to be provided in
accordance with clause 2.1, as it may be updated in accordance with
clause 3.3(a).
…
Landlord’s Works means the works required to complete the
construction of the Improvements as described in the Plans and
Specifications.
Landlord’s Works Costs means the estimated costs that will be
incurred by the Landlord in constructing the Landlord’s Works based
on construction on a level and benched site and excluding costs for
works external to the Premises. To avoid doubt it does not include
any other costs such as design costs, consultants’ fees and any fees,
costs or charges incurred in connection with obtaining the
Development Approval.
…
Premises means the home improvement centre identified in the Plans
and Specifications and on the Site Plan.
…
Site Plan means a site plan showing the layout of the Store and the
Premises on the Land, to be provided by the Tenant to the Landlord
pursuant to clause 2.1.
2.
SC:KS
Development Approval
10
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
2.1
Briefing Kit
The Tenant must, as soon as practicable after the date of this
Agreement, and in any case on or before 15 January 2010, develop and
give to the Landlord the Briefing Kit and the Site Plan.
2.2
Costs Estimate
(a)
(b)
(c)
As soon as reasonably practicable after receipt by the Landlord
of the Briefing Kit the Landlord, acting reasonably and in good
faith, must:
(i)
determine the Landlord’s Works Costs and advise the
Tenant in writing of the Landlord’s Works Costs;
(ii)
provide, on an open book basis, its costing of the
Landlord’s Works Costs; and
(iii)
advise the Tenant whether it requires the Tenant to
contribute towards the Landlord’s Works Costs and the
amount of that contribution (if any).
The Landlord and the Tenant, acting reasonably and in good
faith, must attempt to resolve any differences they may have in
relation to:
(i)
the Landlord’s determination of the Landlord’s Works
Costs; and
(ii)
the amount that the Tenant must contribute towards
the Landlord’s Works Costs (if any) and the manner in
which this contribution will be made.
If, by the later of:
(i)
20 April 2010; and
(ii)
the date which is 6 weeks after the date of receipt by
the Tenant of notice of the Landlord’s Works Costs,
or such later date to which the parties agree, the Landlord and
the Tenant cannot agree on:
(iii)
the Landlord’s Works Costs; or
(iv)
the amount that the Tenant must contribute towards
the Landlord’s Works Costs (if any) and the terms and
conditions on which this contribution will be made,
the Landlord or the Tenant may:
SC:KS
(v)
terminate this Agreement by giving notice in writing to
the other; and
(vi)
procure the withdrawal
Development Approval.
of
the
application
for
11
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(d)
Termination of this Agreement pursuant to clause 2.2(c)(v)
does not prejudice any claim which either party to this
Agreement may have arising from the non-compliance by the
other party of any of its obligations under this Agreement.
(e)
Subject to each party’s rights under clause 2.2(d), if this
Agreement is terminated pursuant to clause 2.2(c), each party
will bear their own legal and other costs and expenses in
connection with this Agreement arising before termination.
(f)
The parties:
(g)
(i)
acknowledge that to expedite the Development
Approval, assistance will be sought from the State
Government pursuant to clause 2.8; and
(ii)
undertake to monitor, as closely as reasonably
practicable, progress of the Government Development
Assistance and to inform each other of such progress
when known.
Without limiting the Tenant’s obligations under clause 2.2(f),
the Tenant undertakes to provide the Landlord with not less
than 10 Business Days prior notice of:
(i)
the date set down for the closing of the public
exhibition of the rezoning of the Land proposed as part
of the Development Approval;
(ii)
the date set down for any panel hearing required to be
held in relation to the application for the Development
Approval; and
(iii)
to the extent possible, any other material steps to be
taken by the State Government as part of the process of
its consideration of the Landlord’s application for
Development Approval.
…
3.
Landlord’s Works
3.1
Completion of Landlord’s Works
The Landlord must at its Cost cause the Landlord’s Works to be
carried out:
SC:KS
(a)
in accordance with the Plans and Specifications;
(b)
in accordance with the Development Approval, all Laws and
consents of and complying with the requirements of all
Government Authorities;
(c)
as expeditiously as possible;
(d)
in a proper and workmanlike manner;
12
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(e)
under adequate and competent supervision; and
(f)
in accordance with the Development Program.
…
6.
Tenant’s Works
6.1
Carrying out Tenant’s Works
In carrying out the Tenant’s Works, the Tenant must:
(a)
comply, and ensure that the Tenant’s Contractors comply, with
the reasonable directions of the Landlord’s Architect for the
delivery, unloading and storage of materials;
(b)
ensure that the Tenant’s Contractors effect and maintain public
liability insurance for cover of not less than $20 million,
contractors all risks insurance for a level of cover reasonably
satisfactory to the Landlord and workers compensation
insurance;
(c)
be responsible for all work carried out on the Tenant’s behalf;
(d)
ensure that the Tenant’s Contractors remove rubbish and
debris on completion of the Tenant’s Works. Any rubbish or
debris not removed from the Land by the Tenant’s Contractors
may be removed by the Landlord. The costs of removal must
be paid by the Tenant; and
(e)
pay for the repair of any damage to the Premises caused as a
result of the Tenant’s Works.
…
9.
The Lease
9.1
Grant of Lease
The Landlord must grant to the Tenant and the Tenant must accept
the Lease for the Term commencing on the Commencement Date.
…
11.
Termination
If for any reason the Landlord’s Works have not reached Practical
Completion by the Termination Date, the Tenant may terminate this
Agreement by notice in writing to the Landlord. If the Tenant
terminates this Agreement, the Landlord must reimburse the Tenant,
on demand, for all Costs and expenses incurred by the Tenant in
connection with this Agreement and anything done by the Tenant in
relation to this Agreement, and for loss of profits in the amount
certified by the Tenant’s Auditor.
…
SC:KS
13
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
14.
Right of First Refusal – Land
14.1
Offer by Landlord
The Landlord must not:
(a)
sell, transfer or otherwise dispose of the Land (or any part of
the Land); or
(b)
cause or permit any change in shareholding of the Landlord or
any holding or parent company of the Landlord as
contemplated under clause 10.2(c).
during the period commencing on the date of this Agreement and
expiring on the Commencement Date, unless the Landlord first offers
to sell the Land (or any part of the Land) to the Tenant by executing
and delivering to the Tenant a contract detailing the price and the
terms and conditions on which the Landlord intends to sell, transfer
or dispose of the Land or any part of the Land.
…
16.
SC:KS
Land
(a)
The Tenant acknowledges that the Landlord is not the
registered proprietor of the Land.
(b)
The Landlord warrants that it has no reason to believe that the
option to purchase the property comprised in Certificates of
Title Volume 8505 Folio 634, Volume 8204 Folio 513, Volume
9051 Folio 930 and Volume 9051 Folio 931 granted to it by the
registered proprietors of that property is not valid and
enforceable.
(c)
The Landlord must use its best endeavours to become the
registered proprietor of the Land on or before the
Development Approval Date.
(d)
If on or before 30 June 2010, the Landlord has not entered into
contracts for the purchase of the Land settlement of which will
take place no more than sixty (60) days after the Development
Approval Date, the Tenant may terminate this Agreement by
giving notice in writing to the Landlord at any time prior to
the Landlord entering into such contracts.
(e)
Subject to paragraph (f), if the Landlord has not become the
registered proprietor of the Land on or before the
Development Approval Date, the Tenant may terminate this
Agreement by giving notice in writing to the Landlord at any
time prior to the Landlord becoming the registered proprietor
of the Land.
(f)
If the Landlord has not become the registered proprietor of the
Land on or before the Development Approval Date but has
entered into contracts for the purchase of the Land settlement
14
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
of which will take place no more than sixty (60) days after the
Development Approval Date and the Landlord has proven to
the reasonable satisfaction of the Tenant that, despite the fact
that it has not become the registered proprietor of the Land by
the Development Approval Date, it will be able to comply with
its obligations under the Agreement, then the Tenant may not
terminate this Agreement under paragraph (e) but, if the
Landlord has not become the registered proprietor of the Land
on a date which is sixty (60) days after the Development
Approval Date, the Tenant may terminate this Agreement by
giving notice in writing to the Landlord at any time prior to
the Landlord becoming the registered proprietor of the Land.
(g)
If this Agreement is terminated pursuant to sub-paras (d), (e)
or (f), the Landlord and the Tenant will bear their respective
costs and expenses incurred prior to the date of termination.
…
Reference Schedule
Item
Number
SC:KS
Item
Term
1.
Land
Certificates of Title Volume
8505 Folio 633, Volume 8505
Folio 634, Volume 8204 Folio
513, Volume 9051 Folio 930,
Volume 9051 Folio 931 and
Volume 7863 Folio 135
2.
Anticipated Date of
Practical
Completion
The date 12 months after the
Development Approval is
obtained.
3.
Approximate
Lettable Area
10,738 square metres.
4.
Termination Date
The date which is 12 months
after the Anticipated Date of
Practical Completion
(ignoring any extension
under clause 3.5)
5.
EIS Period
12 weeks
6.
Term
12 years
7.
Further Terms
6 further terms of 5 years
each.
8.
Square Metre Rate
$120 per square meter
9.
Maximum Rent
Amount
Not applicable.
10.
Development
Approval Date
The date which is 18 months
after the date of this
15
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Agreement.
…
Annexure A
Plans and Specifications
SITE PLAN SCALE 1:1000 @ A3
Contractual framework
Letter of Offer
16
On 2 June 2009, Woolworths and Mr Blake, on behalf of the “Maxi Foods Group”,
signed the Letter of Offer in respect of a proposed agreement for lease and lease of
the Strathdale site. The principal provisions of the Letter of Offer presently of
relevance have been set out previously.12 The Letter of Offer states expressly in
para 24 that it would, on acceptance by the offeree of its terms and conditions,
“create a binding agreement between you and Woolworths”. Paragraph 24 also
expressly records the intention of the parties that a formal agreement for lease would
12
SC:KS
See above [14].
16
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
be executed “based on the Woolworths standard documentation, including the
commercial terms in this letter”. Nevertheless, the manner in which para 24 is
expressed does make it clear that, absent a formal agreement for lease being
executed, there is, nevertheless, a binding agreement created by the Letter of Offer.13
17
The commercial terms included provision for a lease term of 12 years, together with
six five year options for renewal.14 The total estimated area for the hardware store
was 10,535 square metres on a site area of 24,700 square metres (subject to survey).15
Provision was made for a base rent of $1,264,200 per annum, payable as to one
twelfth of that sum monthly.16 This agreed base rent produced a base rent per metre
of $120.17 Provision was made for annual rent increases to CPI, with a cap of four
per cent, including at the commencement of the option periods.18 It was agreed that
the tenant would pay for all services directly supplied to the lease premises and
separately metered, including electricity, gas, telephone and water, and also
separately assessed rates and taxes, including land tax (assessed on a single holding
basis).19
18
The Letter of Offer contemplated in its provisions that the parties to the lease would
be Maxi Foods Group as landlord and Woolworths Limited as tenant.20 Having
regard to the circumstances of the Letter of Offer and the desire of Woolworths to
“roll out” the Masters stores in as short a period as possible, it is probably not
surprising that the parties to the Letter of Offer had not then determined which
corporate entities would be the parties to the contemplated agreement for lease and
lease.
In any event, the position of NES with respect to the operation of the
provisions of the Agreement for Lease with respect to the commercial terms
contained in the Letter of Offer would transcend any issues with respect to
13
14
15
16
17
18
19
20
SC:KS
See Masters v Cameron (1954) 91 CLR 353 at 360. See also John W Carter, Contract Law in Australia
(LexisNexis Butterworths, 6th ed, 2013) [5-02]–[5-04].
See Letter of Offer [5]–[6].
See Letter of Offer [2].
See Letter of Offer [9].
See Letter of Offer [9].
See Letter of Offer [10].
See Letter of Offer [11].
See Letter of Offer [3]–[4].
17
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
congruence of parties as between the Letter of Offer and the Agreement for Lease
and, in any event, Woolworths is a defendant and I do not take it to be disputed that
NES is a corporate entity within the “Maxi Foods Group”.
19
The Letter of Offer was also specifically and expressly subject to various
documentation and approvals.21 The documentation required was the finalisation of
development
plans,
programming,
conditions
precedent
regarding
their
development, Scope of Works and finishes to the satisfaction of Woolworths.
Additionally, in terms of matters involving Woolworths, the offer was subject to the
approval of the Woolworths Board. The process of Woolworths Board approval had
been delegated to the Oxygen Property Committee of Management (“the Property
Committee”), which committee was also delegatee of the Board’s power to approve
sites.22 As far as these conditional provisions were concerned, the offer was subject
to the Maxi Foods Group gaining control of all the land on the Strathdale site in
order to undertake the development. Again, as with respect to the parties to this and
contemplated subsequent agreements, there was no specificity with respect to the
corporate entity within that Group which was to obtain the land.
20
In late May or early June 2009, members of the Woolworths Board inspected the
Bendigo site.23 A submission to the Property Committee, on 22 July 2009, noted that
the Bendigo site presented an opportunity for Oxygen to establish a presence within
Bendigo, had excellent exposure to the McIvor Highway, was well suited to service
the Bendigo area and was well positioned to compete with existing hardware stores
in Bendigo. It was also noted in the submission that strong interest in the Strathdale
site had been shown by Bunnings, as a site for its second store in Bendigo. The
Strathdale site was recommended for approval subject to a site visit and
confirmation of whether the strategy for Bendigo was to pursue one or two stores.
The Property Committee approved the Strathdale site on 4 August 2009; a site which
it considered was in a good location. On 11 August 2009, the Maxi Foods Group was
21
22
23
SC:KS
See Letter of Offer [21].
Transcript 1084.
Transcript 573.
18
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
notified of the approval to proceed according to the binding Letter of Offer.
21
Critically, the submission to the Property Committee also included a business case
for the Bendigo site including an amount that Woolworths was prepared to
contribute to the construction of the Bendigo store. The Property Committee was
required to approve the level of contribution that Woolworths would make towards
the construction of a Masters store.24 In the case of the Bendigo site the business case
justified, and the Property Committee approved, a contribution of up to $1.7
million.25
This budget, however, was never disclosed to NES.
Moreover,
Woolworths was working to a “target” $12 million store cost based on a 13,500
square metre store. This target was also never disclosed to NES.
22
At the same time that the Property Committee resolved to approve the Bendigo site,
the Committee also resolved that Woolworths would pursue only one store in
Bendigo in the foreseeable future—the One Store Policy.26 At that time, the Bendigo
site was considered to be the best site to serve the entire urban area of Bendigo 27 and
the feasibility of the site had been rated “best” amongst the sites being pursued by
Woolworths. The competitive risk from Bunnings was considered to be “high”.28
23
On 25 August 2009, three weeks after the Property Committee approved the binding
Letter of Offer, Woolworths launched its takeover bid to acquire Danks Holdings
Limited (“Danks”).29
In November 2009 and June 2010 Woolworths provided
undertakings to the Australian Competition and Consumer Commission (“ACCC”)
to extend the same terms and conditions to Danks’ members within 10 kilometres of
a Woolworths store to those provided to any other Danks customer, to permit those
members to purchase products from elsewhere and to permit those members to
terminate their agreements with Danks without consequence.30 On 11 November
24
25
26
27
28
29
30
SC:KS
Transcript 1123.
Transcript 1124, 1143. See Court Book 1212.
Court Book 1232, 1238.
Court Book 4488, 4679.
Court Book 4682.
Transcript 26.
Court Book 4535.
19
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
2009 the ACCC announced its decision not to oppose the acquisition. 31 In spite of
the One Store Policy, Woolworths had identified another Home Timber & Hardware
store in Bendigo, the Hume & Iser site, as a priority site to acquire as part of its
Danks acquisition.32
24
Thus far, it may be thought that the provisions of the Letter of Offer were not
unusual. The circumstances in which the Letter of Offer was developed and agreed
were, however, somewhat out of the ordinary, principally because of the speed with
which Woolworths was concerned to “roll out” 150 “big box” hardware stores
within five years. While, at this time, this strategy had been developed on the part of
Woolworths and critical sites had been identified, the detailed designs and
specifications for the Masters stores were not yet complete and the exact cost to
construct one of these stores to the Woolworths specifications was not then known.
This strategy was developed in early 2009 and, by around September 2009, there was
conflict between the strategic objective on the part of Woolworths of entering the
market quickly, securing key sites before Bunnings could secure them and
establishing an immediate market presence on the one hand; and the practical
necessity of completing the designs and specifications and determining the cost to
complete these specifications before entering into binding agreements on the other.
25
As a result of the Woolworths strategy and the urgency involved, Woolworths
decided to enter into binding agreements to secure the critical sites before Bunnings
could
secure
them
and
to
make
arrangements
for
their
development,
notwithstanding that there was no briefing kit, even if this meant that Woolworths
had to assume the risks of unknown construction costs at the time of entering into
agreements for the development of these sites.33 This position is well illustrated in
email correspondence between Mr Grant O’Brien, then Woolworths’ General
Manager for Business Development, and Mr Champion concerning the Strathdale
31
32
33
SC:KS
Transcript 26.
Court Book 4448: Project Jupiter – Home Improvement (Project Oxygen) – Board Presentation (26
February 2009.
Transcript 722, 724.
20
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
site and two other sites on 12 and 13 September 2009, in which Mr O’Brien said:34
[I d]o however want to challenge the “we don’t have a [design] kit response”.
Big issue here that really demonstrates what I’m talking about—bunnings
have a kit and could, as a result beat us to the punch.
We must find a remedy by Monday to this ie strike a cost above which we
contribute—we don’t have a choice …
I remain nervous on these critical issues
And:35
We are aligned—I agree the kits need to be done “tomorrow/asap/
pronto/NOW!!” and I will provide whatever is needed to make this happen.
The point that I was trying to make was not that I am happy for the kits to
take weeks, but even if they are 3 days away I still want to make these lease
deals more binding right now—even if we expose ourselves to the cost of the
unknowns—I don’t want us waiting for the kits—if they come in the next few
days that’s a bonus—but we must act as if they are weeks away and we need
to protect ourselves as though that were the case.
It is noted that NES contends that this correspondence is admissible for the
construction of cl 2.2 of the Agreement for Lease, in that it casts light on the genesis
of these provisions of the Agreement for Lease, its objective aim and meaning;
relying upon Codelfa Construction Pty Ltd v State Rail Authority (NSW)36 and Brambles
Holdings Ltd v Bathurst City Council.37 In my view this correspondence is admissible
on this basis, though it is not critical to the findings which follow.
26
As appears from the evidence,38 in order to enable Woolworths to bind the owners of
identified critical sites to agreements to develop and lease their land before the
construction costs were known, agreements were entered into whereby:
(a)
the rent to be paid by Woolworths for the developed site would be fixed (by
reference to the cost to construct an equivalent store to Bunnings’
specifications, which specifications and costs were known);
34
35
36
37
38
SC:KS
Court Book 1640.
Court Book 1639.
(1982) 149 CLR 337 at 347–52.
(2001) 53 NSWLR 153 at 163 [24].
See especially Transcript 117.
21
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(b)
if the cost to construct the store to the Woolworths plans and specifications
exceeded the cost to construct the store to Bunnings’ specifications (which
was expected to be the case given the higher specifications), Woolworths
would pay the landlord, by way of a lump-sum contribution to the
construction costs, the difference between the actual cost to construct the
Masters store and the cost that had been estimated to construct an equivalent
Bunnings store (on which the rent had been based); and
(c)
the difference between the cost to construct the Masters store in accordance
with Woolworths’ plans and specifications and the cost to construct an
equivalent Bunnings store in accordance with the Bunnings specifications,
being the amount to be contributed by Woolworths, was termed the
Landlord’s Works Costs.
27
It followed that at the time the Letter of Offer was agreed, Woolworths had not
developed a design brief of the proposed store at the Strathdale site and,
consequently, it was simply not possible for the parties to agree on the cost
difference between the development and construction of that store and an equivalent
Bunnings store on that site. As a result, Woolworths and the Maxi Foods Group
agreed that “Rider Hunt quantity surveyors, are to verify the cost difference” once
the Woolworths design brief was issued containing the then current standard
specifications to the proposed new store.39 The parties did not specify what the cost
of a Bunnings store was, or even specify a particular Bunnings design brief that was
to be used by Rider Hunt in verifying the cost difference, or whether the entire cost
of construction for each type of store was to be compared. For example, it is not
specified whether the cost comparison would exclude certain categories of cost, such
as site costs. The Letter of Offer also provided for payment of the difference in cost
as a lump sum, but without specifying the time of payment. The latter also became
an issue between the parties, though Mr Champion’s evidence was to the effect that
all the leasehold deals that had been done by Woolworths involved an agreement to
39
SC:KS
See Letter of Offer [13].
22
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
pay the difference between the Masters and Bunnings costs after the commencement
of the lease.40
Agreement for Lease
28
On or about 24 February 2010, the Agreement for Lease was executed. 41 The critical
provisions of the Agreement for Lease have already been set out.42 The commercial
terms of the Agreement for Lease were the same as the Letter of Offer as to the lease
term, options to renew the lease and the base rent rate. The proposed area for lease
was, however, increased to 10,738 square metres, as opposed to 10,535 square metres
under the Letter of Offer. The parties had not, however, by this time, agreed the cost
of the relevant construction works, now defined in the Agreement for Lease as
“Landlord’s Works Costs” for the Strathdale site, how much Masters would
contribute to those costs or the time and manner at and in which Masters would
make that contribution. Thus, the mechanism adopted was to define Landlord’s
Works Costs in relatively general terms, as follows:
Landlord’s Works Costs means the estimated costs that will be
incurred by the Landlord in constructing the Landlord’s Works based
on constructions on a level and benched site and excluding costs for
works external to the Premises. To avoid doubt it does not include
any other costs such as design costs, consultants’ fees and any fees,
costs or charges incurred in connection with obtaining the
Development Approval.
This general definition was, in turn, supported by the provisions of cl 2.2 of the
Agreement for Lease, which, putting it in very general terms and subject to the
discussion of these provisions which follows in the course of these reasons, required
the parties to resolve these matters between themselves, acting in good faith. Prior
to this process, or in aid of it, cl 2.1 of the Agreement for Lease required the Tenant,
now Shellbelt Pty Limited (guaranteed by Woolworths Limited) to develop and
provide to the Landlord (now North East Solution Pty Ltd, the Plaintiff) the
40
41
42
SC:KS
Transcript 997.
Transcript 997.
See above [15].
23
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
“Briefing Kit” and the “Site Plan”.43
29
Woolworths contend that cl 2.2 of the Agreement for Lease anticipated a materially
different method for resolving outstanding issues with respect to the construction
costs—the Landlord’s Works Costs—how Masters would contribute to those costs
and the manner in which they would be paid from the method adopted in the Letter
of Offer. More particularly, they contend that:
(a)
the Letter of Offer had provided that the differences in cost between the
Masters store and a Bunnings store was to be “verified” by Rider Hunt. It is
said, that, on its face, this left the final say on this key matter entirely to Rider
Hunt. On the other hand, it is said, that cl 2.2 of the Agreement for Lease
anticipated that NES would:
(i)
first “determine” the Landlord’s Works Costs;
(ii)
provide its costing of the Landlord’s Works Costs to Masters on an
open book basis;
(iii)
advise Masters if it required Masters to contribute to the Landlord’s
Works Costs; and
(iv)
with Masters, acting reasonably and in good faith, “attempt to resolve
any differences they may have” as to, among other things, the
Landlord’s Works Costs and how much Masters would contribute to
the Landlord’s Works Costs.
Thus, it is said that, the “determination” by NES was in no way binding upon
the parties, and it was agreed that NES and Masters would negotiate and
attempt to agree the Landlord’s Works Costs, how much Masters would
contribute to the Landlord’s Works Costs, as well as how any contribution
would be paid. On this basis, Woolworths contend that these provisions are,
43
SC:KS
Both the expression “Briefing Kit” and the expression “Site Plan” are defined in clause 1.1 of the
Agreement for Lease: See above [15].
24
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
classically, an agreement to agree, accepting that the parties were bound to
conduct such negotiations reasonably and in good faith.
(b)
the Letter of Offer provided that the tenant was to pay the whole of the
difference in cost as between the construction of a Masters store and a
Bunnings store. On the other hand, it is said that cl 2.2 of the Agreement for
Lease did not even make reference to the calculation of any difference.
Rather, it left the amount that Masters would contribute to the Landlord’s
Works Costs entirely open to good faith negotiations. Moreover, Woolworths
emphasise in their contentions in this respect that the Agreement for Lease
did not necessarily contemplate any contribution to Landlord’s Works Costs.
Moreover, it is said that, as Mr Blake’s evidence made plain, it was also
possible that NES would make a payment to Masters;44 and
(c)
the Letter of Offer provided that the tenant was to pay the difference in the
cost of construction as between a Masters store and a Bunnings store as a
lump sum. It is observed that, on the other hand, cl 2.2 of the Agreement for
Lease provided that if the parties agreed that the Tenant would make a
contribution to the Landlord’s Works Costs, the parties were also to negotiate
and attempt to agree the manner in which such contribution would be made.
Thus, it is said that this, again, was a matter left entirely open to good faith
negotiations.
30
It is also observed by Woolworths that cl 2.2 of the Agreement for Lease did,
however, provide a certain timeframe within which the parties were to agree the
various outstanding matters. They were to do so by the later of 20 April 2010 and
the date six weeks after Masters received a notice from NES of its “determination” of
the Landlord’s Works Costs, or such later date that may be agreed. If agreement was
not reached within that time on each of these matters, then either party could
terminate the Agreement for Lease.
44
SC:KS
See Transcript 189.
25
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
31
NES, on the other hand, contends that the effect of the Agreement for Lease,
particularly cl 2.2, is much more than simply an agreement to agree and did, as the
parties intended, incorporate the commercial terms and the agreement which was
contained in the Letter of Offer. In aid of this position, NES makes reference to the
rules of construction which have been accepted by the courts with respect to
commercial contracts of this kind. It is, therefore, to these principles to which I now
turn briefly as providing a basis to the contentions which follow.
32
As is contended, the principles of contractual interpretation are well established and
are not in this context, as distinct from their application, in controversy between the
parties. In order to determine the meaning or legal effect of a particular contractual
term, the court must construe the contract as a whole.45
Interpretation of a
commercial document requires attention to the purpose of the transaction and the
objects which it is intended to secure.46 Commercial documents of this kind are to be
construed practically and so as to give effect to their “presumed commercial
purposes”.47
33
The second important principle is where the language of the commercial contract is
ambiguous or susceptible of more than one meaning, evidence of the surrounding
circumstances is admissible to assist in the interpretation of the contract.48
The
objective theory of contract is not, however, departed from in this process as the
surrounding circumstances to which reference may be made are the objective
framework of facts within which the contract came into existence. 49 This includes
evidence of the “genesis” and the objective “aim” of the transaction.50
34
The third principle is that where the language of a contract is open to more than one
interpretation, the court should prefer a construction that does not lead to capricious
45
46
47
48
49
50
SC:KS
Bettini v Gye (1876) 1 QBD 183 at 188; Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR
(NSW) 632 at 641.
Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 65 [96].
Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170
ALR 579 at 584 [24].
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352.
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352.
Prenn v Simmonds (1971) 1 WLR 1381 approved by the High Court in DTR Nominees Pty Ltd v Mona
Homes Pty Ltd (1978) 138 CLR 423 at 429.
26
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
or unreasonable results.51 This principle is applicable even though the construction
adopted may not represent the most obvious or grammatically accurate
interpretation.52 The fact that a particular construction leads to an unreasonable
result must be a relevant consideration, as it is unlikely that the parties intended
such a result.53 In circumstances such as this, the language of the contract must be
made to yield to “business common-sense”.54 The underlying assumption behind
this principle, which accords with ordinary experience, is that commercial parties
will not enter into contracts for capricious or unreasonable results, at least in the
course of ordinary commercial relations.
True it is that some capricious or
unreasonable results may be desired by a party in certain circumstances, but these
circumstances are usually those addressed by legislation such as the Australian
Consumer Law or, for example, by equity in relieving against certain unconscionable
bargains. These are, however, not the sort of circumstances that arise in the ordinary
course of commercial agreements. Also, in the application of a principle such as this,
courts must take care not to impose their own views as to what they think “business
common-sense” might be in particular circumstances. Rather, what amounts to
“business common-sense” must be gleaned from the commercial contract and its
context and objective matters to which courts may have regard.
Thus, when
interpreting a contract, a presumption is applied by the courts that the parties did
not intend the terms of the contract to operate unreasonably.55 Where a particular
construction would achieve an unreasonable result, a court will be reluctant to
accept that this was meant by the parties.56 A common sense approach is taken with
an emphasis on the need to arrive at an interpretation which is practical and
commercially sensible; having regard to the proper role of a court in this respect, to
51
52
53
54
55
56
SC:KS
Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 50 [12] citing Australian Broadcasting Commission
v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.
Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 50 [12] citing Australian Broadcasting Commission
v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.
Memery v Trilogy Funds Management Ltd [2012] QCA 160, [14] quoting Elderslie Property Investments No
2 Pty Ltd v Dunn [2008] QCA 158, [20]–[22].
Memery v Trilogy Funds Management Ltd [2012] QCA 160, [14] quoting Elderslie Property Investments No
2 Pty Ltd v Dunn [2008] QCA 158, [20]–[22].
Hankey v. Clavering [1942] 2 KB 326 at 329–30.
See, eg, Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 at 464.
27
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
which reference has been made.57
35
The fourth and perhaps most important and overriding principle or consideration is
that the courts will look to enforce agreements that have been freely entered into by
the parties and to give effect to the objective intention of the parties, rather than to
avoid the agreements.58 The court will be slow to find ambiguity or uncertainty in a
commercial contract where the intention of the parties can be reasonably inferred.59
36
Thus, it is contended by NES that the Letter of Offer and the Agreement for Lease
are clear and unambiguous in their terms, and that the intention of the parties is
clear from the surrounding circumstances. Moreover, it is contended that it is well
established that the terms of a contract will include those terms that the parties
objectively intended to include in it.60 This includes not only those terms that are
articulated in the written document but also, where the nature and context of the
transaction requires it, unexpressed content that it can legitimately be inferred was
intended by the parties.61 Terms such as this are to be inferred, rather than implied,
on the basis of the objective intention of the parties.62
37
Thus, in the present circumstances, NES contends that to the extent that it is
necessary to determine whether or not terms of the Letter of Offer are incorporated
into the Agreement for Lease,63 either by inference or by implication, the intention of
the parties is clear in that para 24 of the Letter of Offer relevantly provided that the
Agreement for Lease was to include “the commercial terms in this letter”.
57
58
59
60
61
62
63
SC:KS
See, eg, Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 708–9 (practical, businesslike and commercially
realistic interpretation); Attaleia Marine Co Ltd v Bimeh Iran (Iran Insurance Co) (The Zeus) [1993] 2
Lloyd’s Rep 497 at 500 (construction of insurance policy so as to achieve sensible business efficacy).
Watson v Phipps (1985) 60 ALJR 1 at 3; Fitzgerald v Masters (1956) 95 CLR 420; Secured Interest Real Estate
(Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596.
Upper Hunter County District Council v Australian Chilling & Freezing Co (1968) 118 CLR 429; Meehan v
Jones (1982) 149 CLR 571; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at
616–17. See also Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326.
Riverwood International Australia Pty Ltd v McCormick (2000) 177 ALR 193 at 208.
See Nick C Seddon, Rick A Bigwood and Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract
(LexisNexis Butterworths, 10th ed, 2012) [10.18].
Hawkins v Clayton (1988) 164 CLR 539 at 570; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422;
Breen v Williams (1996) 186 CLR 71 at 91.
For example, if it was necessary to determine whether the contribution payment was to be paid as a
“lump sum” as provided by cl 13 of the Letter of Offer.
28
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Consequently, it is submitted that in order to give effect to the intention of the
parties, as stated, it must follow that where a commercial term in the Letter of Offer
has not been included in the Agreement for Lease, then that term will be
incorporated by inference into the Agreement for Lease.
Similarly, where the
Agreement for Lease is silent on a commercial term, or part of a commercial term,
such as the method of payment of the Landlord’s Works Costs, then that term will
also be incorporated. It is submitted that it is only where the Agreement for Lease
expressly purports to vary or rescind the existing agreement—the terms of which
were agreed to be incorporated—or contains a term that expressly contradicts a
commercial term in the Letter of Offer, that it should be inferred that the parties
intended for the Letter of Offer or any of its terms to be discarded or disregarded.
Thus, it is contended that the Court should construe both the Letter of Offer and the
Agreement for Lease so as to do the least harm to what the parties objectively
intended.
38
Additionally, it is contended that, in equity, where the Letter of Offer promises the
inclusion of terms in the Agreement for Lease, but such terms are omitted, equity
will take as done that which ought to have been done absent evidence of an intention
to vary the original agreement.64
39
For these reasons, NES contends that the requirement that the Masters contribution
be paid by a lump sum, for example, which is contained in para 13 of the Letter of
Offer, a commercial term that is not inconsistent with any express term in the
Agreement for Lease, will be taken to be incorporated by inference or implication
into the Agreement for Lease. The same, it is said, will be true of the requirement in
para 13 of the Letter of Offer that any cost difference be verified by Rider Hunt, the
nominated quantity surveyors. Additionally, it is submitted by NES that the parties
have in fact acted as if these contractual terms from the Letter of Offer had been
incorporated in the Agreement for Lease. An example contended for by NES is the
permitting of Rider Hunt to conduct the open book review process, as further
64
SC:KS
Porters v Cessnock City Council (2005) 12 BPR 23,209; Re Anstis (1886) 31 Ch D 596; De Beers Consolidated
Mines Ltd v British South Africa Co [1912] AC 52 at 65–6; Frederick v Frederick (1721) 93 ER 632.
29
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
evidence of the common assumption of the parties that the commercial terms of the
Letter of Offer be incorporated into the Agreement for Lease. With respect to this
example, it should be noted that there is controversy between the parties as to the
nature of the open book process and which party was required to initiate and carry
out the process. In any event, returning to the contentions of NES, it is said that, if
necessary, the departure from any such common assumption of the kind to which
reference has been made would give rise to a conventional estoppel.65
40
In relation to the interaction between the Letter of Offer and the Agreement for
Lease, the contention of Woolworths is that the latter, formal agreement, replaced
the former entirely.
41
More particularly, as a matter of pleading, Woolworths draw attention to paras 4, 7
and 8 of the Further Amended Statement of Claim (“the FASC”) 66 which plead two
agreements to lease—the Letter of Offer and the Agreement for Lease, and plead that
the first was “succeeded and replaced” by the second, except where there were
commercial terms that had not been superseded by or in conflict with the second,
such terms being incorporated into the second.67 It is said, however, that the FASC
does not identify the commercial terms of the first agreement that it says were not
superseded by or in conflict with the second agreement.
This pleading is not,
however, in my view, inconsistent with the position contended for by NES and, to
the extent that the pleading does not identify commercial terms, I am of the opinion
that it is clear from the manner in which the case was conducted by the parties that
the relevant commercial terms the subject of contentions by NES in this respect are
clear; particularly having regard to the relative brevity and, though perhaps
deceptive, simplicity of the provisions of the Letter of Offer and the Agreement for
Lease.
42
Woolworths also draw attention to the fact that the parties to the Letter of Offer and
65
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR
226 at 244; Davis v CGU Insurance Ltd (2009) 104 SASR 422; Alpha Wealth Financial Services Pty Ltd v
Frankland River Olive Co Ltd (2008) 66 ACSR 594 at 602 [27], 629 [164].
Further Amended Statement of Claim (25 May 2015) [4], [7]–[8].
Defendants’ Closing Submissions (3 September 2015) [42].
66
67
SC:KS
30
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the Agreement for Lease—both as to the landlord and the tenant—are different.
Consequently, it is submitted that by the execution of the second agreement, the
Agreement for Lease, the parties to the first, the Letter of Offer, must be taken to
have agreed to the first agreement having been discharged. That is, each agreement
was for a lease over the same land. The different landlords could not each have
granted a lease to the different tenants. Thus, it is said that the only live question is
whether any of the terms of the Letter of Offer survive, in effect, as implied terms in
the Agreement for Lease. In this respect it is also said that, at trial, Senior Counsel
for NES eschewed any intention to seek rectification of the Agreement for Lease, but
said that the “commercial terms” of the Letter of Offer would be incorporated into
the Agreement for Lease and that para 13 was one of the commercial terms.68
Indeed, this is the position contended for by NES and, on this basis, rectification
would not be necessary as the commercial terms of the Letter of Offer would simply
survive by way of incorporation or implication in the Agreement for Lease and it
would also follow that the differences in parties would not be significant. Moreover,
as has already been observed, the parties to the Agreement for Lease are not
strangers to the entities which were parties to the agreement the subject of the Letter
of Offer.
Thus, when one is looking at the objective factual matrix from the
perspective of the Agreement for Lease and through the eyes of the parties to that
agreement, it would be artificial in the extreme to treat the commercial terms and
background to the Letter of Offer as extraneous to those in which the terms of and
hence the construction of the provisions of the Agreement for Lease, is to take place.
43
Again, with reference to the pleadings, Woolworths made submissions with respect
to terms alleged by NES to be implied into the Agreement for Lease, “in order to
give business efficacy” to that agreement.69 These terms, apparently taken from or
based on para 13 of the Letter of Offer, are as follows:
(a)
that the design brief would contain the current standard specification of the
guarantor (Woolworths);
68
69
SC:KS
Transcript 35–6.
Further Amended Statement of Claim (25 May 2015) [10].
31
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(b)
that should the design brief differ in cost from other major trade
supply/restricted retail premises (full height precast brief), the difference in
cost was to be paid by Masters by lump sum payment to NES; and
(c)
that Rider Hunt were to verify the cost difference on behalf of Woolworths.
Woolworths also say that it should be noted that this alleged implied term differs in
a material respect from para 13 of the Letter of Offer in that the latter does not
contain the qualification “on behalf of Woolworths”. That is, it is said, that by
para 13 of the Letter of Offer, it is arguable that Rider Hunt were to bind both
parties.
44
With respect to these alleged implied terms, Woolworths say that they are not
required to give business efficacy to the Agreement for Lease and that they are also
inconsistent with the express wording and, or alternatively, the scheme or effect of
cl 2.2 of the Agreement for Lease and cannot, consequently, be implied.70
Specifically, it is contended that:
(a)
to the extent that the first alleged implied term is intended to be a reference to
the “Briefing Kit” defined in cl 1.1 of the Agreement for Lease,71 then such an
implied term is not required to give business efficacy to the Agreement for
Lease. To the extent that it is a reference to something else, it is inconsistent
with cll 1.1 and 2.1 of the Agreement for Lease;
(b)
the second alleged implied term is inconsistent with cl 2.2 of the Agreement
for Lease in a number of respects. That is, cl 2.2:
(i)
makes no reference whatsoever to a Bunnings design brief;
(ii)
leaves it to the Landlord, in the first instance, to determine the cost of
the construction for the Briefing Kit;
(iii)
70
71
SC:KS
leaves it entirely open as to the basis upon which the Landlord might
Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507.
As the “specification briefing kit to be provided in accordance with clause 2.1”.
32
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
determine the amount it asks the Tenant to contribute to the cost of
construction; and
(iv)
makes no mention of any such contribution being paid as a lump sum.
Indeed, it expressly identifies that the manner in which such
contribution is to be paid (if agreed) is to be a matter for further
agreement; and
(c)
the third alleged implied term is also contrary to cl 2.2 of the Agreement for
Lease. By cl 2.2, Rider Hunt has no prescribed role. Clause 2.2(b) anticipates
that the parties will attempt to resolve by agreement any differences they
have. It was left up to the parties, unfettered by anything other than an
obligation to act reasonably and in good faith, to determine how to resolve
any differences, including whether or not to engage or involve third parties.
Rider Hunt were not required to verify anything and neither Woolworths nor
NES were bound by any “verification” given by Rider Hunt.
Woolworths also make the point that the Lease contains an entire agreement clause
which records, significantly it is said, that the Agreement for Lease and the Lease
record the entire agreement of the parties in relation to the Strathdale site.72
45
Concluding their submissions in this respect, Woolworths make reference to the
operation of cl 2.2 of the Agreement for Lease as they say it is seen by NES as
indicated by its pleadings in the FASC.73
On the basis of these pleadings,
Woolworths contend that the NES position is as follows:
(a)
NES pleads compliance by NES with cl 2.2(a) of the Agreement for Lease
(determination of Landlord’s Works Costs, provision of open book costings
and the advice as to the required contribution by the Tenant);74
(b)
72
73
74
SC:KS
NES pleads that Rider Hunt then verified, on behalf of Woolworths, the
But see below [46].
Further Amended Statement of Claim (25 May 2015) [12]–[15].
Further Amended Statement of Claim (25 May 2015) [12].
33
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
difference between the Landlord’s Works Costs and the cost of the Bunnings
brief75—presumably, therefore, allegedly settling that difference insofar as
Woolworths were concerned.76 The scheme of the pleadings is, it is said, that
at this stage in the process, Rider Hunt’s role is complete; and
(c)
thereafter, and consistent with other pleadings,77 the posited process
anticipates that NES and Masters would seek to resolve such differences, as
verified by Rider Hunt, directly between them. That is, so it seems, by a
process of commercial negotiation, acting reasonably and in good faith.78
46
In my view, the principles applicable to the construction of commercial contracts,
such as the Letter of Offer and the Agreement for Lease, the subject of submissions
by NES are applicable in the present circumstances and would enable NES to call in
aid the provisions of the Letter of Offer insofar as they have not been abrogated or
varied by clear provisions of the Agreement for Lease. For the preceding reasons the
entire agreement provisions to which Woolworths make reference do not provide
anything in the nature of such an abrogation or variation.79
Quite clearly, the
commercial parties to the Letter of Offer intended its terms to have meaning and to
be binding. It follows that the commercial context and the factual matrix in which
the Agreement for Lease was entered into by corporate entities associated with and
contemplated, at least in general terms, by the parties to the Letter of Offer must be
accommodated and given effect to by implication or incorporation into the terms of
the Agreement for Lease. The consequences in terms of the nature and effect of the
contractual obligations between the parties to the Agreement for Lease are matters to
which I now turn.
75
76
77
78
79
SC:KS
In its further and better particulars, NES says that Rider Hunt’s “verification … on behalf of Masters
and Woolworths is particularised in” a report that Rider Hunt prepared for Mr Macmillan on or
about 22 April 2010. See Answers to the Request by the Defendants for Further and Better Particulars of the
Plaintiff’s Statement of Claim and Reply (27 August 2012) [4]: Court Book 59.
Further Amended Statement of Claim (25 May 2015) [13].
Further Amended Statement of Claim (25 May 2015) [14]–[15].
See also Further Amended Statement of Claim (25 May 2015) [15(viii)].
See above [44].
34
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Nature and effect of contractual obligations
47
In terms of the nature and effect of the contractual obligations, particularly cl 2.2 of
the Agreement for Lease and para 13 of the Letter of Offer, the parties differ. The
principal differences between the parties in this respect are that, as indicated thus
far, NES contends for the continued operation of the provisions of the commercial
terms contained in the Letter of Offer with respect to the nature and effect of the
contractual obligations under the Agreement for Lease, whereas Woolworths
contend that the latter, formal agreement, stands independently of the Letter of Offer
provisions.
Additionally, and importantly, NES contends that cl 2.2 of the
Agreement for Lease provides an enforceable mechanism for resolving differences
between the parties with respect to the Landlord’s Works Costs and related matters,
whereas Woolworths contend that the effect of cl 2.2 in this respect is really nothing
more than an agreement to negotiate which, consequently, produces no enforceable
outcomes. I turn now to some particular aspects of these differences of approach.
48
Woolworths contend that cl 2.2 of the Agreement for Lease anticipates four distinct
stages.
First, determination of Landlord’s Works Costs and the Tenant’s
contribution;80 secondly, identification of any differences; thirdly, attempted
resolution of any differences;81 and, if any differences are not resolved by a defined
date, termination of the Agreement for Lease.82
49
As to the first stage, Woolworths contend that all of the action takes place, or must
take place, at the hands of the Landlord, NES. They say that before Masters is
required to do anything, NES must do four things. First, “determine” the Landlord’s
Works Costs; secondly, advise the Tenant of its “determination”; thirdly, provide to
the Tenant its “open book costing” of the Landlord’s Works Costs; and fourthly,
advise the Tenant whether it requires the Tenant to contribute towards the
Landlord’s Works Costs and the amount of such contribution.
In this context,
Woolworths also contend that no guidance is given to NES as to how it is to
determine the Landlord’s Works Costs or the amount of any contribution it may
80
81
82
SC:KS
Agreement for Lease, cl 2.2(a).
Agreement for Lease, cl 2.2(b).
Agreement for Lease, cl 2.2(c).
35
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
require from the tenant to the Landlord’s Works Costs. It is said, however, that this
does not create any uncertainty in the process, as it is left entirely to NES to tell the
Tenant how any such contribution ought to be paid. As a matter of fact, in the
present circumstances, Woolworths contend that NES did not tell Masters how it
required any contribution to be paid to it until 6 April 2010.83
50
At the second stage, which Woolworths say is reached before the provisions of
cl 2.2(b) of the Agreement for Lease apply with respect to the third stage, there must
be identification of the differences, if any, as to these matters. In other words, it is
submitted, it was only at the point that the parties knew what the differences were
that they could attempt to resolve those differences by negotiation. Further, it is
said, the contract clearly anticipates that before the parties attempt to resolve the
differences, the Landlord, NES, must provide its open book costing of the Landlord’s
Works Costs. It is said that this was clearly required in order for the parties, acting
reasonably and in good faith, to identify items of cost wrongly included in the
Landlord’s Works Costs, or wrongly calculated.
51
Woolworths contend that at the third stage, the parties were to attempt to resolve
any differences as to three things. They are, first, the Landlord’s “determination” of
the Landlord’s Works Costs; secondly, the amount, if any, that the Tenant must
contribute to the Landlord’s Works Costs; and thirdly, the manner in which any
contribution is to be paid.84
52
At the fourth stage, Woolworths contend that either party may terminate the
Agreement for Lease if by, in the present case, 20 April 2010, agreement had not
been reached on the amount of the Landlord’s Works Costs, the amount that the
Tenant must contribute to the Landlord’s Works Costs and the manner in which it
must do so.85
53
Thus, Woolworths contend that crucial to the process was the obligation on NES to
83
Court Book 3353–4.
See Agreement for Lease, cl 2.2(b).
See Agreement for Lease, cl 2.2(c).
84
85
SC:KS
36
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
provide its open book costing of its determination of the Landlord’s Works Costs
and the identification of any differences. In other words, it is said, the obligation to
resolve the differences and, therefore, to act reasonably and in good faith in so
doing, only arose once the open book costing had been provided and the differences
had been identified. These were preconditions, it is contended by Woolworths, to
the obligation to resolve and negotiate the differences.
In the present case,
Woolworths contend that the evidence shows that these preconditions were never
satisfied.
54
Moreover, as is discussed further, Woolworths contend that neither the Letter of
Offer nor the Agreement for Lease provided any guidance to NES or to Woolworths
as to how to go about resolving any differences as to these matters. That is, the
Agreement for Lease pointed to no external standard to apply for the calculation of
the Landlord’s Works Costs or the cost of constructing “other major trade
supply/restricted retail premises (full height precast brief)”.86 Additionally, it is said
that the Agreement for Lease provided no process to follow or principle to apply to
resolve any differences as to these matters. Thus, Woolworths offer the observation
that having regard to these uncertainties, it is hardly surprising that the parties were
confused as to the process to be followed in order for agreement to be reached.
55
NES, on the other hand, contends that the provisions of cl 2.2 of the Agreement for
Lease are clear and unambiguous, and that the provisions of that clause are neither
too illusory, too vague nor too uncertain to be enforceable. As discussed previously,
this position is consistent with, and flows from, the reading of the provisions of cl 2.2
in their factual matrix and, particularly relevantly, the provisions of para 13 of the
Letter of Offer. In other words, the agreement between the parties, NES contends, is
quite clear and, broadly speaking, involves a payment by Woolworths or one of their
subsidiaries of a sum towards what is styled as “Landlord’s Works Costs”, being the
difference between the cost of constructing a Bunnings store as compared to the cost
of constructing a Masters store on the Strathdale site.
86
SC:KS
Given the uncertainties
Letter of Offer [13].
37
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
involved as a result of the rapid rollout of Masters stores, as has been discussed, and
the absence of detailed design briefs, the agreement between the parties relied upon
determination of the Landlord’s Works Costs on good faith dealings between them.
Thus, the question becomes whether the provisions of cl 2.2 of the Agreement for
Lease insofar as they rely upon negotiation reasonably and in good faith, provide a
certain and enforceable obligation or whether it merely constitutes, as Woolworths
contend, an agreement to negotiate. For the preceding reasons and those which
follow, I am of the view that the provisions of cl 2.2 of the Agreement for Lease are
sufficiently certain to be enforceable.
I turn now to consider the position with
respect to negotiating reasonably and in good faith on the basis of the authorities.
56
As a general proposition, the authorities establish that an agreement to negotiate
“reasonably” and “in good faith” is sufficiently certain to be enforceable. In this
context, NES submits that the duty contained in cl 2.2(b) of the Agreement for Lease,
to act reasonably and in good faith so as to resolve any differences the parties may
have in relation to the calculation of construction costs of the development on the
Strathdale site is, in its context, clear and has a sensible and ascribable meaning.
Consequently, it is contended that it should therefore be enforced. In this respect,
reference is made to the judgment of Allsop P (as the Chief Justice then was) in
United Group Rail Services Ltd v Rail Corporation of New South Wales, where his Honour
said:87
If business people are prepared in the exercise of their commercial judgement
to constrain themselves by reference to express words that are broad and
general, but which have sensible and ascribable meaning, the task of the
Court is to give effect to, and not to impede, such solemn express contractual
provisions.
57
It is the position, as identified by Woolworths, that the good faith obligation has
been the subject of extensive judicial and academic analysis and that there does
remain considerable debate regarding the proper definition and scope of the
obligation.88
87
88
SC:KS
Moreover, it is clear from the authorities that the content of the
(2009) 74 NSWLR 618 at 639 [74].
See generally Elisabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths,
2003).
38
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
obligation
is
context-dependent
and
moulded
according
to
the
relevant
circumstances. Of course, having regard to the nature of the obligation, this is
unsurprising. The context here, as Woolworths contend, is an obligation on the part
of sophisticated commercial parties to act “reasonably and in good faith” in
attempting to agree outstanding commercial terms. The parties were not fiduciaries
and there was no special character or quality to the relationship between them.
Moreover, it is said that there was also no dependency or long term intersection of
interests, as is typically the case in, for example, the franchising context. Although it
might be said that the latter proposition is not so clear in the present context having
regard to the long term leasing arrangements provided for in the Agreement for
Lease, this does not, in my view, affect the nature and content of the good faith
obligation in the present context.
58
It is also clear from the authorities that a breach of the good faith obligation will not
be made out even if the court finds that the processes followed by the relevant party
were sub-optimal or, with the benefit of hindsight or otherwise, the responses or
steps taken could have been more helpful. More is required to make out a breach of
an obligation to act in good faith.
59
A formulation of the good faith obligation to which reference is often made was
provided by Sir Anthony Mason in an address given at the University of Cambridge,
in which he noted that the concept of “good faith” embraced three related notions,
namely: an obligation on the parties to cooperate in achieving the contractual objects
(loyalty to the promise itself); compliance with honest standards of conduct; and
compliance with standards of conduct that are reasonable having regard to the
interests of the parties.89
60
Allsop P (as the Chief Justice then was) similarly described the “usual content” of the
obligation of good faith, based on a line of authorities from the New South Wales
89
SC:KS
Sir Anthony Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 Law
Quarterly Review 66. See Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 335–6
[49], 348 [92]; Alcatel Australia v Scarcella (1998) 44 NSWLR 349; Burger King Corporation v Hungry Jack’s
Pty Ltd (2001) 69 NSWLR 558 at 570 [169]–[173]; Overlook Management BV v Foxtel Management Pty Ltd
[2002] NSWSC 17, [64].
39
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Court of Appeal, as follows: obligations to act honestly and with a fidelity to the
bargain; obligations not to act dishonestly and not to act to undermine the bargain
entered or the substance of the contractual benefit bargained for; and obligations to
act reasonably and with fair dealing having regard to the interests of the parties
(which will, inevitably, at times conflict) and to the provisions, aims and purposes of
the contract, objectively ascertained.90
61
The notions or elements inherent in the good faith obligation to which reference has
been made are not, however, to be regarded as a code, or to be applied
independently of each other.91 Various authorities and commentaries have spoken
in terms of conduct that involves “bad faith” or that violates community standards
of decency, fairness and reasonableness,92 an obligation not to act capriciously,93 or
not acting in an arbitrary manner or for an extraneous purpose. 94 Although it has
been said that ideas of unconscionability, unfairness and lack of good faith “have a
great deal in common”,95 it does not follow that these concepts are synonymous;
indeed, the authorities demonstrate the contrary. Nevertheless, it is clear that an
obligation to act in good faith does not require one contracting party to subordinate
their interests to those of another.96
62
The obligation to act in good faith was again discussed in detail quite recently by the
90
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA
268, [12] citing Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234,
Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31
NSWLR 91, Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558, Alcatel Australia Ltd
v Scarcella (1998) 44 NSWLR 349 and United Group Rail Services Ltd v Rail Corporation New South Wales
(2009) 74 NSWLR 618. See also the important judgment of Kirby P (as he then was) in Coal Cliff
Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1; Chief Justice James Allsop, “Some Reflections
on Good Faith in Contract Law” (Speech delivered to the Oxford University Obligations Group,
2012); Chief Justice Marilyn Warren, “Good Faith: Where Are We At?” (2010) 34 Melbourne University
Law Review 344.
Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 348 [92].
Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33 at 50–1 [56], referring to commentary to
S2-103(1)(b) of the United States Uniform Commercial Code. See also the brief survey of “persuasive
cases in influential jurisdictions in the United States” given by Allsop CJ in Paciocco v Australia and
New Zealand Banking Group Ltd (2015) 321 ALR 584 at 651 [291].
Gary Rogers Motor (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, [37].
Alcatel Australia v Scarcella (1998) 44 NSWLR 349 at 368; Far Horizons v McDonald’s Australia [2000]
VSC 310, [120].
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 268.
Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584.
91
92
93
94
95
96
SC:KS
40
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Full Court of the Federal Court, where Allsop CJ discussed and reaffirmed the
notions or elements inherent in the obligation, by reference to the developing
jurisprudence:97
[287]
… [Good faith] is a conception that has been recognised (though not
by all courts in Australia) as an implication or feature of Australian
contract law attending the performance of the bargain and its
construction and implied content.98
Yet, good faith in the
performance of contracts is well-known to the common law and to
civilian systems. It is a good example of the presence of values in the
common law. I repeat what I said in United Group Rail Services Ltd v
Rail Corporation New South Wales (in a commercial context of a clause
expressly incorporating good faith):99
[G]ood faith is not a concept foreign to the common law, the law
merchant or businessmen and women. It has been an underlying
concept in the law merchant for centuries. It is recognised as part
of the law of performance of contracts in numerous sophisticated
commercial jurisdictions. It has been recognised by this Court to
be part of the law of performance of contracts.
97
98
99
100
101
102
103
104
SC:KS
[288]
The usual content of the obligation of good faith that can be extracted
from cases such as Renard Constructions (ME) Pty Ltd v Minister for
Public Works,100 Hughes Bros Pty Ltd v Trustees of the Roman Catholic
Church for the Archdiocese of Sydney,101 Burger King Corporation v Hungry
Jack’s Pty Ltd,102 Alcatel Australia Ltd v Scarcella,103 and United Group
Rail Services Ltd v Rail Corporation New South Wales104 is an obligation
to act honestly and with a fidelity to the bargain; an obligation not to
act dishonestly and not to act to undermine the bargain entered or the
substance of the contractual benefit bargained for; and an obligation to
act reasonably and with fair dealing having regard to the interests of
the parties (which will, inevitably, at times conflict) and to the
provisions, aims and purposes of the contract, objectively ascertained.
[289]
None of these obligations requires the interests of a contracting party
to be subordinated to those of the other. It is good faith or fair dealing
between the parties by reference to the bargain and its terms that is
called for, be they both commercial parties or business dealing with
consumers. As Posner J said in Market Street Associates Ltd Partnership
v Frey the contractual notion of good faith varies in what is required
Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584 at 649–51 [287]–[293]
(citations omitted).
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Aircraft
Systems International v Airservices Australia (1997) 76 FCR 151; Nick C Seddon, Rick A Bigwood and
Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract (LexisNexis Butterworths, 10th ed, 2012)
[10.41]–[10.47]. Cf Commonwealth Bank of Australia v Barker (2014) 253 169 at 195–6 [42], 214 [107].
(2009) 74 NSWLR 618 at 634 [58] (citations omitted).
(1992) 26 NSWLR 234.
(1993) 31 NSWLR 91.
(2001) 69 NSWLR 558.
(1998) 44 NSWLR 349.
(2009) 74 NSWLR 618.
41
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
for its satisfaction by reference to the nature of the contract.105 But the
notion is rooted in the bargain and requires behaviour to support it,
not undermine it, and not to take advantage of oversight, slips and the
like in it. To do so is akin to theft, and if permitted by the law led to
over-elaborate contracts, and defensive and mistrustful attitudes
among contracting parties. At 595 Posner J said:106
The contractual duty of good faith is thus not some newfangled
bit of welfare-state paternalism or … the sediment of an altruistic
strain in contract law, and we are therefore not surprised to find
the essentials of the modern doctrine well established in
nineteenth century cases.
105
106
107
108
109
110
111
112
SC:KS
[290]
The standard of fair dealing or reasonableness that is to be expected in
any given case must recognise the nature of the contract or
relationship, the different interests of the parties and the lack of
necessity for parties to subordinate their own interests to those of the
counterparty. That a normative standard is introduced by good faith
is clear. It will, however, not call for the same acts from all contracting
parties in all cases. The legal norm should not be confused with the
factual question of its satisfaction. The contractual and factual context
(including the nature of the contract or contextual relationship) is vital
to understand what, in any case, is required to be done or not done to
satisfy the normative standard.
[291]
It is unnecessary to deal with the jurisprudence on the subject of good
faith in other jurisdictions, beyond saying that the above expression of
the matter is consistent with the content ascribed to the phrase “good
faith“ in persuasive cases in influential jurisdictions in the United
States: for example, refraining from acting with subterfuge and
evasion;107 refraining from opportunistic conduct such as by taking
advantage of a disadvantageous position of the other party who has
performed first;108 refraining from hindering or preventing the
occurrence of conditions of the party’s own duty or the performance
of the other party’s duty;109 cooperating to achieve the contractual
goals.110 The above are but a few examples.
[292]
Good faith does not import an equitable notion of the fiduciary that is
rooted in loyalty to another in the service of her or his interests.111
Rather, it is rooted in honest and reasonable fair dealing.112
(1991) 941 F 2d 588.
Market Street Associates Ltd Partnership v Frey (1991) 941 F 2d 588 at 595.
Daitch Crystal Dairies Inc v Neisloss 190 NYS 2d 737 (Appeal Div 1959); Harbor Insurance Co v
Continental Bank Corp 922 F.2d 357 (7th Cir 1990).
Industrial Representatives Inc v CP Clare Corp 74 F.3d 128 (7th Cir 1996).
See the discussion in Edward Allan Farnsworth, Farnsworth on Contracts (Wolters Kluwer, 3rd ed,
2004) Vol 2 § 7.17 p 362, § 8.6, 8.15.
Larson v Larson 636 NE 2d 1365 (Mass App Ct 1994); AMPAT/Midwest Inc v Illinois Tool Works Inc 896
F.2d 1035 (7th Cir 1990). See generally Edward Allan Farnsworth, Farnsworth on Contracts (Wolters
Kluwer, 3rd ed, 2004) § 7.17–7.17b; Director General of Fair Trading v First National Bank Plc [2002] 1 AC
481 at 494, 500, 505.
Lionel Smith, “Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of
Another“ (2014) 130 Law Quarterly Review 608.
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA
42
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
[293]
63
Trickery and sharp practice impede commerce by decreasing trust and
increasing risk. Good faith and fair dealing promote commerce by
supporting the central conception and basal foundation of commerce:
a requisite degree of trust. Business people understand these things.
In this context, Woolworths submit that the use of the phrase “reasonably and in
good faith” is, in cl 2.2 of the Agreement for Lease, a “composite phrase”, which
involves the use of terms which are intertwined and complementary, and which
does not impose two separate standards of conduct. Even if this position were to be
accepted, it might nevertheless be thought that the elements of the expression—each
limb—would inform the other even if no more than one standard of conduct is to be
taken to be prescribed.113
64
As Priestley JA observed in Renard Constructions (ME) Pty Ltd v Minister for Public
Works:114
in ordinary English usage there has been constant association between the
words fair and reasonable. Similarly, there is a close association of ideas
between the terms unreasonableness, lack of good faith, and
unconscionability. Although they may not be always co-extensive in their
connotations, partly as a result of the varying senses in which each expression
is used in different contexts, there can be no doubt that in many of their uses
there is a great deal of overlap in their content …
65
Although, as Priestly JA observed, there is a great deal of overlap in the ordinary
meaning of words used in the composite expression “reasonably and in good faith”,
it does not follow, either from this observation or ordinary English usage, that the
ingredients of the composite as used in cl 2.2 of the Agreement for Lease lose the
force of their separate meanings.
Thus, I am of the view that though these
ingredients may overlap in their meanings, this does not constrain their separate
operation in the context of these provisions.
66
When considering a statutory immunity for “anything necessarily or reasonably
done or omitted to be done in good faith”, the Victorian Court of Appeal in Victoria v
Horvath said that the expression should be read as a whole and that the word
113
114
SC:KS
268, [12]–[13].
See United Group Rail Services Limited v Rail Corporation New South Wales (2009) 74 NSWLR 618 at 625–
6 [28]–[29].
(1992) 26 NSWLR 234 at 265.
43
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
“reasonably” cannot be construed as importing a totally objective test. 115 That is, the
proper test to be applied was to have regard to all of the circumstances existing at
the time and, viewed from the perspective of the person claiming immunity, and ask
whether reasonable grounds existed for the course of action adopted.116 Moreover,
the Court of Appeal, in the process of reading this expression as a whole, did not
regard that approach as detracting from the position that each word used was to be
given meaning. Thus, the Court (Winneke P, Chernov and Vincent JJA) said:117
Section 123 accordingly contains a number of limiting expressions. The acts
or omissions which would otherwise give rise to civil liability must be
“necessarily or reasonably” performed or omitted “in good faith” and, of
course, “in the course of duty”. There is a considerable overlap between
these notions. Thus, for example, for the section to operate, all relevant acts
or omissions had to be performed in the course of duty of the member
concerned. Clearly, conduct not undertaken in good faith could not be
regarded as being relevantly linked to the performance of the member’s duty.
Further, an act or omission not in good faith could hardly be described as
necessarily or reasonably done, or not done, in the course of duty. Moreover,
whatever test of reasonability was adopted, it would have to be assessed in
terms of the duty of the member in the circumstances in which that member
was placed.
The interdependence of the notions underlying these
expressions, acknowledging that as a matter of statutory interpretation
proper effect must be given to each of the words used, makes it apparent that
the expression anything necessarily or reasonably done or omitted to be done in
good faith in the exercise of his or her duty should be read as a whole.
In my view, there is no basis to confine this approach to statutory interpretation in
the context of the provisions of cl 2.2 of the Agreement for Lease.
67
Woolworths contend that the courts have “tended to equate or incorporate
reasonableness with or into fair dealing and good faith”, referring to the judgment of
Allsop P (as the Chief Justice then was) in Macquarie International Health Clinic Pty Ltd
v Sydney South West Area Health Service.118 The President did not, however, put the
position so starkly. Rather, Allsop P emphasised the importance of context in the
interpretation of provisions imposing good faith obligations and highlighted
115
116
117
118
SC:KS
(2002) 6 VR 326 at 345 [47]–[48]. Police Regulation Act 1958, s 123(1) provides: “A member of the force
or a police recruit is not personally liable for anything necessarily or reasonably done or omitted to be
done in good faith in the course of his or her duty as a member of the force or police recruit.”
Victoria v Horvath (2002) 6 VR 326 at 345–6 [50].
(2002) 6 VR 326 at 345 [47] (emphasis in original).
[2010] NSWCA 268, [15].
44
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
unresolved issues with respect to obligations of “reasonableness” and “good faith”,
in the following terms:119
[14]
It is important to recognise that these obligations must be assessed
and interpreted in the light of the bargain itself and its contractual
terms. Those terms, however, must be assessed and interpreted in the
light of the presence of the obligation of good faith, here pursuant to
an express clause.
[15]
Whilst the cases in this court have tended to equate or incorporate
reasonableness with or into fair dealing and good faith, that is not
without its controversy.120 Nevertheless, in these contracts, with
express clauses of this width that have a necessary place in the
working out and performance of the contracts, in some cases over
many years, an objective element of reasonableness in fair dealing is
appropriate, taking its place with honesty and fidelity to the bargain
in the furtherance of the contractual objects and purposes of the
parties, objectively ascertained.
As to the controversy, the discussion of issues and authorities to which reference is
made by Allsop P is particularly helpful. More specifically, discussing the notion of
“reasonable conduct”, Peden writes:121
Sir Anthony Mason stated that the obligation of good faith includes
“compliance with standards of conduct which are reasonable having regard
to the interests of the parties”. If by this were meant that contracts will be
construed reasonably, considering the position of the parties, then there
would be no argument that that is a correct statement of principle, and
another example of an element of good faith in our law. Indeed, this is what
is probably meant by Lord Wright in Hillas & Co Ltd v Arcos Ltd:122
[one should not ignore] the legal implication in contracts of what is
reasonable, which runs throughout the whole of modern English law
in relation to business contracts.
It is also true that some gaps in contracts will be filled with concepts of
“reasonableness”, such as “reasonable time” and “reasonable price”, where
no time or price is specified. However, this is not the same as requiring a
standard of objectively “reasonable” exercise of rights, when the contract
does not require such a standard.
If what is meant by “reasonable behaviour” is subjective reasonableness, then
this description really goes no further than requiring “honesty”. However, it
119
120
121
122
SC:KS
[2010] NSWCA 268, [14], [15]. See also [9].
Elisabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths, 2003) 159–99. See
especially 162–99. See also Edward Allan Farnsworth, Farnsworth on Contracts (Wolters Kluwer,
3rd ed, 2004) 400.
Elisabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths, 2003) 162–4, [7.5]
(citations omitted).
[1932] All ER Rep 494 at 507.
45
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
seems that many are confusing an obligation of objectively “reasonable”
behaviour with “good faith”, or imposing both obligations at once. In Burger
King Corporation v Hungry Jack’s Pty Ltd,123 the NSW Court of Appeal
repeatedly referred to terms of “good faith and reasonableness”124 and in fact
stated:125
it is worth noting that the Australian cases make no distinction of
substance between the implied term of reasonableness and that of
good faith. As Priestley JA said in Renard Constructions (ME) Pty Ltd v
Minister for Public Works:126 “The kind of reasonableness I have been
discussing seems to me to have much in common with the notions of
good faith”. Priestley JA commented further at 265 that: “in ordinary
English usage there has been constant association between the words
fair and reasonable. Similarly, there is a close association of ideas
between the terms unreasonableness, lack of good faith and
unconscionability.”
With respect, to equate an obligation of reasonableness and one of good faith
is misconceived. There is no doubt that our law, including contract law, is
concerned about fairness and justice. There are arguments that there is no
need for a distinct obligation of good faith, since the law is scattered with
examples of legal principles designed to bring about fairness and justice,127
such as promissory estoppel and many construction rules such as contra
proferentum. However, as more courts are incorporating good faith
obligations into contracts, the meaning of “good faith” must be given a much
more precise meaning than “fairness”, “justice” or even “reasonableness”.
This distinction has been recognised in other areas, such as “satisfactory
finance” clauses, where the High Court has construed such conditions as
requiring honesty, but has not taken the step of also requiring reasonable
behaviour.128
To introduce a requirement that parties exercise their rights “reasonably”
would also require a reconsideration of the principle in White and Carter
(Councils) Ltd v McGregor,129 which, to date, has never even been discussed in
“good faith” cases. The decision is taken as authority for the propositions
that a party does not have to mitigate loss if suing in debt rather than
damages and that a party cannot be compelled to terminate a contract for
repudiation by the other party, and the choice must not be exercised
123
124
125
126
127
128
129
SC:KS
(2001) 69 NSWLR 558.
See, eg, Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 at 568 [159], 569 [163]–
[164].
Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 at 570 [169]–[170]. For other
examples of combining of “reasonableness” and “good faith”, see, eg, Elfic Ltd v Macks [2000] QSC 18,
[109]; Commonwealth Bank of Australia v Renstel Nominees Pty Ltd [2001] VSC 167, [47]. In NSW v
Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503 at 530 [72], Einstein J hinted there might be a
difference between reasonableness and good faith, but then cited Burger King Corporation v Hungry
Jack’s Pty Ltd (2001) 69 NSWLR 558, which states there is no difference.
(1992) 26 NSWLR 234 at 263.
See, eg, Michael G Bridge, “Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?”
1984) 9 Canadian Business Law Journal 385, 409.
See Meehan v Jones (1982) 149 CLR 571. The distinction is recognised in the area of a mortgagee’s
power of sale as well. See Gerard Kelly, “The Mortgagee’s Duty of Sale: Retracing some Well Worn
Paths” (1998) 6 Australian Property Law Journal 1.
[1962] AC 413.
46
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
reasonably. At present, the authority seems to be at odds with the
introduction in other areas of a good faith obligation.
It is interesting that in Renard Constructions (ME) Pty Ltd v Minister for Public
Works130 Priestley JA moved away from his earlier extra-judicial statement
that “[r]easonableness and good faith are distinct concepts in contract law,
each also being distinct from the ideas of unconscionability; each one may
tend to overlap with either of the others.”131 As Stapleton has pointed out, a
standard of objectively reasonable behaviour is far more onerous than a
requirement of good faith behaviour.132 A party may have behaved in good
faith, yet still have behaved unreasonably.133 Also, “provided the party
exercising the power acts reasonably in all the circumstances, the duty to act
fairly and in good faith will ordinarily be satisfied.”134 Furthermore, it is
possible that a party has behaved reasonably, yet still an “unreasonable”
outcome is achieved, viewed from the perspective of the other party.135
While “reasonable” or “fair” behaviour is imposed on corporations vis-à-vis
consumers in a variety of contexts, it seems an extreme step for courts to
impose an obligation of reasonableness on commercial parties contracting at
arm’s length. It seems bizarre that courts are prepared to require commercial
parties to behave reasonably towards each other, when they have not
expressly included such a standard and the terms of the mutually agreed
contract are very clear. As the English Court of Appeal has said when
refusing to imply a term in law:136 “[t]he common law cannot … devise such a
duty which the legislature has not thought fit to impose and it could not be
just or reasonable for the court to impose it.”
68
It follows that the contention by Woolworths that the general comment made by the
New South Wales Court of Appeal in Burger King Corporation v Hungry Jack’s Pty Ltd,
(to which reference is made by Peden in the passage set out above) effectively
conflated obligations of “reasonableness” and “good faith” cannot be accepted at
face value.137 The general comment must be viewed in the context of that appeal and
the authorities more broadly. In my view, the position contended for is clearly not
established—on the basis of the authorities and commentary to which reference has
been made and in the further authorities relied upon by Woolworths in this respect.
130
131
132
133
134
135
136
137
SC:KS
(1992) 26 NSWLR 234.
L J Priestley, “Contract—The Burgeoning Maelstrom” (1988) 1 Journal of Contract Law 15, 28.
Jane Stapleton, “Good Faith in Private Law” (1999) 52 Current Legal Problems 1, 8.
Compare the many legislative definitions of good faith that will permit negligent behaviour, which
would arguably not be sanctioned by a standard of reasonableness.
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, [37]. See also Lay v Alliswell
Pty Ltd (2002) V Conv R 54-651, [31].
See, eg, Paragon Finance Plc v Staunton; Paragon Finance Plc v Nash [2002] 2 All ER 248 at 267, where a
mortgage company had a discretion to vary interest rates, and it was held the company had to behave
reasonably, but this did not extend to requiring the company to set reasonable rates.
Reid v Rush Tompkins Group Plc [1990] 1 WLR 212 at 230.
(2001) 69 NSWLR 558.
47
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
It is to these further authorities relied upon to which I now turn.
69
Reliance is placed by Woolworths on the following part of the judgment of Warren
CJ in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL, particularly para
3:138
138
139
140
141
142
143
144
145
SC:KS
2.
The development of the law relating to good faith has travelled an
almost full circle. Following initial hesitation, even reluctance,139 by
the courts to imply such a duty, there was a discernible preference to
imply, instead, a duty of co-operation to secure performance of the
contract.140 However, there has been clear recognition of the doctrine
of good faith.141 That said, courts have, more often than not, decided
these matters on other bases and thereby avoided the conceptual
difficulty that can attend the concept of a duty of good faith. The
courts seem, by and large, to have postulated “… if there is a duty of
good faith …” then the duty must be owed mutually,142 and further,
account should be taken of the commercial might and capacity of the
affected contracting party. Thus, if both parties to the subject contract
breached such duty, neither should be able to rely on an alleged
breach of duty of good faith. In essence, the concept of “clean hands”
comes into play.143
3.
There has also been consideration of the capacity of a contractual
party to look after itself and its own interests rather than turn to
concepts of good faith for relief.144 These approaches, more aptly
described as judicial reticence, regarding the application of the
doctrine of good faith, may be construed as hesitation at the courts’
involvement in contractual performance. If a duty of good faith exists,
it really means that there is a standard of contractual conduct that
should be met. The difficulty is that the standard is nebulous.
Therefore, the current reticence attending the application and
recognition of a duty of good faith probably lies as much with the
vagueness and imprecision inherent in defining commercial morality.
The modern law of contract has developed on the premise of
achieving certainty in commerce. If good faith is not readily capable
of definition then that certainty is undermined. It might be that a duty
of good faith is no more than a duty to act reasonably in performance
and enforcement, a long established duty.145 Of course, some
[2005] VSCA 228, [2]–[4] (citations omitted).
See, eg, Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263–4.
See also, Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 96.
See, eg, Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at
607; CSS Investments Pty Ltd v Lopiron Pty Ltd (1987) 16 FCR 15; Adelaide Petroleum NL v Poseidon Ltd
(1990) 98 ALR 431; Australian Mutual Provident Society v 400 St Kilda Road Pty Ltd [1990] VR 646.
See, eg, Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 at 191; Alcatel
Australia v Scarcella (1998) 44 NSWLR 349 at 369; Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000]
VSC 310.
See, eg, Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443, [91], [94].
See, eg, Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443, [91], [94].
See, eg, Playcorp Pty Ltd v Taiyo Kogyo Ltd [2003] VSC 108, [267].
See Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288 at 297.
48
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
commentators have regarded the duty to act reasonably as properly
subsumed within the duty of good faith.146
4.
70
Ultimately, the interests of certainty in contractual activity should be
interfered with only when the relationship between the parties is
unbalanced and one party is at a substantial disadvantage, or is
particularly vulnerable in the prevailing context. Where commercial
leviathans are contractually engaged, it is difficult to see that a duty of
good faith will arise, leaving aside duties that might arise in a
fiduciary relationship. If one party to a contract is more shrewd, more
cunning and out-manoeuvres the other contracting party who did not
suffer a disadvantage and who was not vulnerable, it is difficult to see
why the latter should have greater protection than that provided by
the law of contract.
The further authorities relied upon by Woolworths take the analysis no further and
are, in my view, merely instances of the application of obligations of reasonableness
and good faith—accepting that the concepts overlap but without conflating or
absorbing one concept into the other as a mere incident of the broader concept.
Thus, in Expectation Pty Ltd v Pinnacle VRB Ltd, in the context of a duty of good faith
in negotiations, Steytler J (with whom McKechnie and Jenkins JJ agreed) quoted the
trial judge in that case as having said that a clause expressly stating that the parties
would negotiate in good faith had “placed a mutual obligation on the parties ‘to
negotiate in good faith, to do what was reasonably required in the circumstances
affecting the parties to enable the contingent elements of the contract comprised in
the letter agreement to be satisfied within the time framework provided, including
any extension agreed upon.’”147 In Sundararajah v Teachers Federation Health Ltd,
Foster J noted that “if a contract contains a requirement that the parties act in good
faith, they must act honestly, not capriciously, and reasonably.”148
71
In Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd, Finkelstein J noted
that—149
a term of a contract that requires a party to act in good faith and fairly,
imposes an obligation upon that party not to act capriciously. … [P]rovided
the party exercising the power acts reasonably in all the circumstances, the
146
147
148
149
SC:KS
See Nick C Seddon and Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract (LexisNexis
Butterworths, 8th ed, 2002) 428 [10.48].
Expectation Pty Ltd v Pinnacle VRB Ltd [2004] WASCA 261, [32]. See also [7].
(2011) 283 ALR 720 at 731 [68].
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, [37].
49
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
duty to act fairly and in good faith will ordinarily be satisfied.
Similarly, in Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd, Bergin J (as
her Honour then was) found that the terms of a clause of an agreement requiring the
defendant to not act unreasonably when the plaintiff sought access to its land made
the additional implication of a duty to act reasonably and in good faith
“unwarranted” in respect of that clause.150 By contrast, her Honour found that for
the other clauses in question, which did not contain a requirement of reasonableness,
it would be “necessary for the defendant to act reasonably and in good faith for the
plaintiff to have the benefit of the Deed.”151
72
Thus the position in light of the authorities is that whilst there is considerable
overlap with respect to an obligation to act reasonably and an obligation to act in
good faith, the concepts are not co-extensive and are not to be conflated. Moreover,
the content of each depends, in particular cases, on the terms in which the parties
provide for such obligations, or either of them, and the circumstances in which they
are said to operate.
73
A further, more specific, question arises as to whether the obligation in cl 2.2(b) of
the Agreement for Lease is capable of being enforced, at least in the manner asserted
by NES.
74
In Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd, the obligation was to conclude a
contract for the sale and purchase of certain land “acting in good faith”.152 During
negotiations, the defendant (Cable Sands) proposed that the plaintiff (Strzelecki
Holdings) provide an indemnity and a $25 million, 20-year bank guarantee to
address the risk to the defendant of purchasing land that contained radioactive
tailings and potential claims that could be made against the defendant arising from
the use of the land. This was said to be unreasonable. Murphy JA noted to this
effect that:153
150
151
152
153
SC:KS
[2006] NSWSC 1235, [56]. See also [13] where the relevant clauses of the agreement are extracted.
Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd [2006] NSWSC 1235, [57].
(2010) 41 WAR 318.
Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 351–2 [108].
50
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
The issue raised for negotiation was, in my view, a matter for each party’s
commercial judgment. Strzelecki Holdings’ submission in effect invites the
court to resolve disputes arising in the negotiation process by determining
“objectively” the permissible content of each party’s commercial self-interest
in relation to proposed terms addressing the subject matter of the sale. That,
in my view, does not accord with the intention of the parties to the
[Memorandum of Understanding].
Further, Pullin JA said:154
Parties engaged in negotiations to conclude a contract owe each other no
fiduciary obligations and they are not required to act in the interests of the
other party. That being so, it is difficult to know what the third aspect means
in this context unless the reference to reasonable standards of “conduct” is a
reference to conduct which permits the negotiations to proceed. The
[Memorandum of Understanding] clearly contemplates that they “deal” with
each other by negotiating. This does not suggest that the content of an offer
made in negotiations where the parties must deal with each other in good
faith must pass some objective test of reasonableness to be assessed by the
courts.
75
Woolworths submit that these passages highlight the difficulty in giving contractual
force to an obligation to act in good faith in circumstances where the substantive
right to which the obligation attaches is an agreement to negotiate key commercial
terms to the contract; that is, an “agreement to agree”. In the present case, the
Defendants contend that the obligation is to act “reasonably” and in good faith in
resolving the differences, not to negotiate a “reasonable” Landlord’s Works Costs
amount. Paraphrasing Murphy JA, the Defendants say that the Plaintiff invites the
Court to find that Woolworths breached their good faith obligations in the
negotiation process intended to agree key commercial terms, by determining
“objectively” the permissible content of each party’s commercial self-interest in
relation to the amount of the Landlord’s Works Costs, the amount of any
contribution to the Landlord’s Works Costs and the manner in which such a
contribution was to be paid.155
76
Moreover, Woolworths submit that the inability to determine the permissible
content of their commercial self-interest highlights a crucial gap in the contractual
framework. That is, it is said, notwithstanding the apparent intention of the parties
154
155
SC:KS
Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 339 [62] (citations omitted).
See Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 351–2 [108].
51
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
to negotiate such differences as there may have been between them as to—
(a)
the amount of the Landlord’s Works Costs;
(b)
the difference in cost to a Bunnings brief;
(c)
the amount, if any, that Masters should contribute to that difference; or
(d)
the manner in which any such contribution should be paid,
the Agreement for Lease is silent as to the way in which the parties were to resolve
such differences, except insofar as cl 2.2(b) requires them to act “reasonably and in
good faith”. As discussed in these reasons, I reject this characterisation of the effect
of the provisions of the Agreement for Lease and the Letter of Offer properly
construed.
Moreover, the further authorities relied upon by the Defendants in
support of their characterisation and effect of the provisions of the Agreement for
Lease do not, in my view, support the Woolworths position and, rather, emphasise
the critical importance of the provisions of the agreement between the parties.156
77
Thus, as submitted by Woolworths, Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd
indicates that, in principle, an agreement to negotiate in good faith can be
enforceable, but whether this is the case depends upon the proper construction of the
agreement.157 Crucially, that case and cases that have followed it establish that a
court must look to the content of the obligation and ask, in effect, “What is it that the
parties are required to negotiate? Is the Court able to fill in the blanks?”158 It is only
if the Court can answer these questions that it can judge whether the parties’
conduct in endeavouring to negotiate those matters has been honest, reasonable et
cetera. That is, whether they have negotiated in good faith.
78
I do not see it as controversial or critical to the NES position that the present is not a
“process case”, such as discussed in Wellington City Council v Body Corporate 51702
156
157
158
SC:KS
See Defendants’ Closing Submissions (3 September 2015) [94]–[100].
(1991) 24 NSWLR 1 at 26–7.
See AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd [2010] 2 Qd R 101; Jobern Pty Ltd v BreakFree Resorts (Vic)
Pty Ltd [2007] FCA 1066; United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74
NSWLR 618.
52
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(Wellington)159 and applied in AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd.160 Such cases
do, as Woolworths submit, typically concern dispute resolution clauses in which the
court is called upon to enforce a clause that specifies, with precision, how certain
negotiations are to be conducted, and concerns the steps required to attempt to
resolve the dispute rather than the outcome of the dispute. As might be said, cases
of this kind are about the journey, not the destination.161 A leading example of such
a case is United Group Rail Services Ltd v Rail Corporation New South Wales, in which a
dispute resolution clause contained an obligation to meet and undertake “genuine
and good faith negotiations”.162
79
Woolworths contend that not only does cl 2.2(b) provide no process to “resolve any
differences” in the key commercial terms, but it is clearly directed towards having
the parties agree those terms (that is, it is said, the destination). Moreover, it is
contended that cl 2.2(b) is an agreement to agree, not an agreement to follow a
particular process; as, it is said, there is no process to follow. Woolworths add that
this is not a case where an external arbitrator has been nominated to resolve the
outstanding differences.163 While, they say, this might have been the case under
para 13 of the Letter of Offer, by which Rider Hunt was to “verify the cost
difference”, this was not carried forward to cl 2.2 of the Agreement for Lease.
Indeed, NES expressly eschews such a role for Rider Hunt, pleading only that it was
an implied term of the Agreement for Lease that Rider Hunt was to verify the cost
difference “on behalf of Woolworths”. That is, Woolworths say, NES eschews Rider
Hunt having any role in binding NES. As is discussed in these reasons, this is, in my
view, a very narrow approach to the construction of cl 2.2 of the Agreement for
Lease and completely ignores the relevant factual matrix and any importance or
effect of the provisions of the Letter of Offer, particularly para 13.
159
160
161
162
163
SC:KS
[2002] 3 NZLR 486 at 495–6.
[2010] 2 Qd R 101.
Trevor Thomas, “The Enforceability of Agreements to Negotiate in Major Constructions Projects”
(2009) 25 Building and Construction Law Journal 94, 95.
(2009) 74 NSWLR 618. This is to be contrasted with Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd
(2010) 41 WAR 318, which concerned a Memorandum of Understanding containing an obligation to
negotiate a contract for a sale of land “in good faith”. The court there did not consider whether such a
term was enforceable—rather, it seems to have been assumed by the parties that it was.
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 27.
53
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
80
Further, the Defendants submit that this is not the type of case where the parties
have provided a readily ascertainable external standard, by which the Court may be
able to “add flesh to a provision which is otherwise unacceptably vague or uncertain
or apparently illusory”.164 More particularly, they submit that:165
98.
99.
164
165
SC:KS
…
(a)
the [Landlord’s Works Costs] were not susceptible to a readily
ascertainable external standard. That was the very subject of
one of the matters in dispute;
(b)
while the parties identified that the tenant was to pay the
difference between the cost of a Masters store and the cost of
“other major trade supply/restricted retail premises (full
height precast brief)”, there is no external standard for the cost
of “other major trade supply/restricted retail premises (full
height precast brief)”. The evidence showed that NES used
estimates from two separate builders (Troons and Vaughans)
for the cost of constructing a Bunnings store for determining
what it “required” Masters to contribute to the [Landlord’s
Works Costs]. However, the evidence also showed that it is far
from clear which Bunnings briefs were used by each of those
builders or the assumptions and inputs used by each of them
for making their estimates (although the position is clearer
with Vaughans, as a result of the exercise conducted with RLB
to scrutinise Vaughans’ estimates). No such exercise was ever
conducted in respect of Troons’ estimates. This evidence will
be considered in more detail below. For now, however, it is
noted that there was no “readily ascertainable external
standard” for even this part of the process;
(c)
in any event, the use of the “Bunnings” brief to identify the
difference in cost to the [Landlord’s Words Costs], says nothing
about how the parties were to resolve that difference. The
contract is, in effect, in this crucial respect a blank canvas (or a
“blank space” in the words of Kirby P in Coal Cliff Collieries);
and
(d)
finally, there is no external standard of any type for how the
parties were to resolve their differences as to the manner in
which any contribution to the [Landlord’s Words Costs] was to
paid.
In respect of the substantive commercial terms, this is a case about an
incomplete contract, which the courts will not enforce. That is, the
key commercial terms of the amount of the [Landlord’s Words Costs],
the amount (if any) that the tenant would contribute to those costs,
and the manner in which such costs would be paid, had not been
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 27.
Defendants’ Closing Submissions (3 September 2015) [98]–[100] (emphasis in original and citations
omitted).
54
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
agreed. The [Agreement for Lease] was incomplete pending further
agreement between the parties, which never eventuated.
100.
81
The fact that some progress was made in bridging the gap between
the parties does not indicate that a contractual requirement to
negotiate the remaining matters is capable of enforcement. It is, at
best, evidence of the good faith of the negotiations that were occurring,
unguided as they were by objective standards or commercial
yardsticks.
As discussed in these reasons, the position contended for by Woolworths with
respect to the enforceability of the provisions of cl 2.2 of the Agreement for Lease to
which reference has been made represents a very narrow and, in my view, erroneous
approach to the construction of these provisions. Among other things, it ignores the
relevant factual matrix to these provisions and any significance or effect of the
provisions of the Letter of Offer, particularly para 13.
82
As appears from the preceding discussion, the duty to “act reasonably” imposes on a
party an obligation to cooperate in achieving the contractual objects (loyalty to the
promise itself); to comply with honest standards of conduct; and to comply with
standards of conduct which are reasonable having regard to the interests of the
parties.166 A duty to act reasonably, which is often classified as falling within the
obligation to act in good faith,167 so as to achieve a contractual goal has been held to
be “necessarily conditioned by what is reasonable in the circumstances”. 168 The
circumstances must include the nature of the commitment that has been made and
the circumstances in which it was given. In my view, it is correct to say, as NES
contends, that cl 2.2(b) of the Agreement for Lease is, in all the circumstances, not a
commitment to negotiate, free from any constraints. It is, in the circumstances and
having regard to the provisions of the Letter of Offer, a commitment to act
reasonably and in good faith in an attempt to resolve differences in relation to a cost
estimate. The object of this process and of the clause itself was to enable the parties
to quantify the difference in cost as between the development of the Strathdale site
as a Bunnings store and the development of that site as a Masters store, costs which
166
167
168
SC:KS
Sir Anthony Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 Law
Quarterly Review 66.
See Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263.
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 659 [41].
55
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Woolworths had already committed to pay. In my view, it is clear that the content of
the duties to act reasonably and to act in good faith must be informed by these
circumstances. As NES observes, by way of example, while it may be reasonable for
a party not to disclose the basis of its position in a mediation or negotiation, where
the object is merely to negotiate in one’s own self-interest, refusing to provide the
information necessary to identify differences between the parties, where the object of
the duty is to resolve such differences, such conduct will be unreasonable and,
depending on the precise circumstances, probably also a failure to act in good faith.
83
As is discussed further in these reasons, NES contends that Woolworths took into
account extraneous matters that were not contemplated by the Agreement for Lease,
including Woolworths’ undisclosed budget, their desire to pursue an alternative site
and perceptions about NES’s financial position and opposition from the Council or
residents, and that Woolworths purported to perform their obligations and exercise
the power to terminate the Agreement for Lease without the requisite contractual
object in mind. In this respect, NES submits that the requisite contractual object was
solely the identification and resolution of differences in the calculation of the
Landlord’s Works Costs and the Tenant’s contribution to those costs, which
contribution Woolworths had already committed to make.
84
NES submits that by acting with other extraneous objects in mind, such as the
matters to which reference has been made, Woolworths did not act faithfully to the
contractual object or in good faith.
Similarly, NES submits that, having been
diverted by the object of bringing the construction costs for the Strathdale site within
their undisclosed budget, Woolworths failed to take all reasonable steps to identify
and resolve any differences they may have had in relation to NES’s calculation of the
Landlord’s Works Costs and the Masters contribution.
NES contends that
reasonable steps in this context are the steps that a reasonable person only acting
with the contractual object in mind would have taken, including engaging with NES,
inviting it to open book meetings, sharing information and accurately trying to
resolve any differences, whether or not the resulting number exceeded Woolworths’
SC:KS
56
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
approved budget.
85
NES submits that, having failed to act reasonably and in good faith to identify and
resolve any differences with NES’s estimate of the Landlord’s Works Costs and the
Masters contribution, Woolworths then terminated the Agreement for Lease for
reasons that were not permitted under that agreement. Moreover, NES contends
that on the basis of the evidence as to the matters raised in its submissions, to which
reference has been made in the preceding paragraphs of these reasons, there is every
reason to believe that there was no “genuine” disagreement between the parties as to
the calculation of the Landlord’s Works Costs. Moreover, it is said that the Rider
Hunt estimate at the end of the open book review process exceeded the contribution
sought by NES on 1 April 2010. Specifically, NES submits that if there were such a
difference or differences, Mr Macmillan admitted that these were never identified by
Woolworths or communicated to NES in any meaningful way.169 This, NES says,
was a prerequisite to negotiating or resolving any such differences.
86
More specifically, NES submits that insofar as it is necessary to decide why
Woolworths did not act reasonably, or in good faith to identify or resolve any such
differences, the Court should find that Mr Macmillan was constrained from
negotiating and agreeing the Landlord’s Works Costs with NES until such a time as
those costs could be brought within Woolworths’ undisclosed budget.
Mr
Champion admitted Mr Macmillan had no authority to negotiate and agree a sum
outside the approved budget.170
In relation to the decision by Woolworths to
terminate the Agreement for Lease, NES contends that the documentary evidence
clearly establishes that Woolworths had decided to pursue the alternative Hume &
Iser store well before there had been any negotiation or disagreement between the
parties as to the calculation of the Landlord’s Works Costs171 and that Woolworths
took into account various other extraneous factors which were not permitted under
the Agreement for Lease, including perceived opposition by the Council or residents
169
170
171
SC:KS
Transcript 853–4, 961.
Transcript 1084.
Transcript 1148.
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JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
and a mistaken belief that NES may have had funding issues.172
87
Concluding these series of submissions, NES contends that Woolworths’ failure to
give Mr Macmillan the authority to do that which was required under the
Agreement for Lease, namely to negotiate and agree on the calculation of the
Landlord’s Works Costs, even if it exceeded Woolworths’ undisclosed budget, and
having committed itself to pursuing an alternative site, the Court should find that
Woolworths’ conduct in “negotiating” the Landlord’s Works Costs up to and
including the meeting on 22 April 2010 was in bad faith. It is said that it was in bad
faith because it was not done faithfully to the sole contractual object and in defiance
of the obligations imposed by the Agreement for Lease. It is to these issues that I
now turn in the context of the evidence. For the reasons which follow I am of the
view that the position put by NES in these series of submissions is made out on the
evidence.
Factual issues
Letter of Offer
88
The Strathdale site was initially brought to the attention of Woolworths by Mr Blake
in or around May 2009 as a result of enquiries by Woolworths whether NES had a
parcel of land that was suitable for the development of an Oxygen (Masters) store in
Bendigo.173 As discussed in the preceding reasons, the purpose of the Letter of Offer
was to record the agreement to construct and lease a Masters store at the Strathdale
site. Having regard to the terms of the Letter of Offer and the Agreement for Lease,
little turns on the circumstances in which the site was identified and the detail of
meetings in the early stages between Mr Blake, then on behalf of the “Maxi Foods
Group”, and Mr Macmillan on behalf of Woolworths. In any event, it is clear that, as
required by the Letter of Offer, the Property Committee, which had delegated
authority from the Woolworths Board of Directors, approved entry into the Letter of
172
173
SC:KS
Transcript 899, 1177.
Court Book 982.
58
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Offer on 4 August 2009.174 As the evidence indicates, considerable effort was put
into the submission that went to the Property Committee in support of the site.175 At
this stage, the submission contemplated a capital contribution of $1.7 million to be
incurred by Woolworths in respect of the difference between the generic Bunnings
and Masters stores.176
Costing of generic design briefs
89
After the execution of the Letter of Offer, Mr Blake provided Woolworths with
information to assist in obtaining Board approval, drafting of an agreement for lease
was commenced, negotiations were conducted as to its terms and Woolworths
continued to develop the design brief for the new Masters stores. By about July
2009, Design Kit Rev A for a generic Masters store of 13,500 square metres had been
prepared. By early September 2009, Rider Hunt estimated the cost of constructing a
13,362 square metre store based on this brief to be $15.4 million,177 and the difference
in cost to build a Bunnings store was estimated to be approximately $3,266,000.178
Woolworths, however, considered that the cost was far too high and that Design Kit
Rev A would need to be re-engineered to reduce the costs.179
90
As the revised design brief had not been completed by late September 2009,
Woolworths suggested that Mr Blake have his builders prepare a brief for the cost of
constructing a Masters store on the Strathdale site. In response, on 9 October 2009,
Mr Blake provided, by email, a proposed brief prepared by Troons. In this Troons
brief, it was stated that the rate to construct a 10,535 square metre “Woolworths”
warehouse was $780 per square metre plus GST, excluding head works, external
boundary works and full height precast concrete panels.180 As to the latter, Mr Blake
quoted a price of $8,467,300 plus GST as the price including the full height precast
174
175
176
177
178
179
180
SC:KS
Court Book 1205–9.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [16]–[25]; Outline of Brendan Edward
Blake (6 March 2015) [75]–[76], [78]–[79].
Court Book 4490.
Court Book 1358–9.
Court Book 1679, 1606.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [51]–[52]; Further Outline of Evidence
of Ewen Kenneth McDonald in Reply (31 March 2015) [3]–[5].
Court Book 1845.
59
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
concrete panels. This price was, however, as Mr Blake’s email makes clear, actually
the lowest price for a store with full height precast concrete panels. The additional
cost of the full height precast concrete panels was expressed as a range, which
produced a rate of between $804 per square metre and $808.50 per square metre.
These prices represented Troons’ estimate of the cost of building a 10,535 square
metre “Bunnings” warehouse. The Woolworths brief was not yet available at this
time.
Subsequently, Troons told Mr Blake that it would not be involved in
constructing a store for Woolworths due to its commercial ties to Bunnings.181
91
By mid-December 2009, Design Kit Rev B had been prepared and costed,182 and an
estimate has been prepared by Rider Hunt of the cost difference between the
construction of a Masters store with a total enclosed area of 13,465 square metres and
a Bunnings “S9” store (May 2008 Brief Rev 2) with a total enclosed area of 14,072
square metres.183 The Rider Hunt estimate of the cost of a generic Masters store with
a total enclosed area of 13,465 square metres was $12,104,254, and their estimate of
the cost difference to the comparable Bunnings store was $1,176,562. 184 This Rider
Hunt costing translated at a rate of $899 per square metre. Mr Blake was provided
with access to the Design Kit Rev B on 13 January 2010,185 and on 29 January 2010
arrangements were made for Mr Blake’s new builder, Vaughan Constructions Pty
Ltd (“Vaughan Constructions”), to be given access to the design kit to enable it to
prepare an estimate of the cost of building the store.186
92
Rider Hunt provided Woolworths with a further estimate for the cost of a generic
Masters store on 3 February 2010. This estimate was with respect to a store of 13,676
square metres and was for a sum of $12 million; which translates to a rate of $877 per
square metre.187 This was the final cost plan prepared by Rider Hunt for a generic
181
182
183
184
185
186
187
SC:KS
Outline of Brendan Edward Blake (6 March 2015) [143].
By Slattery Pty Ltd and Rider Hunt: Court Book 2194, 2295–6.
Court Book 2417.
This estimate was for a 13,465 square metre store, which is larger than the 10,923 square metre store at
the Strathdale site. It was on this basis that Woolworths’ expectations were that the Strathdale store
would cost roughly $1 million: Transcript 692.
Court Book 2648, 4005, 4008.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [60]–[63].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [9].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Masters store of 13,500 square metres based on Design Brief Rev B, and was the
generic cost plan that, thereafter, was referred back to by Rider Hunt, although the
target cost plan for individual sites would vary from site to site.188
Agreement for Lease
93
As discussed previously, the formal Agreement for Lease was executed on
24 February 2010. A number of the conditions provided for in paragraph 21 of the
Letter of Offer were not satisfied at the time the Agreement for Lease was executed.
An example cited by Woolworths in this respect is that the Maxi Foods Group had
not gained control of all the land on the site, and development plans and
programming had not been finalised. As indicated previously, it is also clear that at
this stage, development plans, programming, conditions precedent regarding
development, scope of works and finishes to Woolworths’ satisfaction had not
occurred as the design brief for the Masters store at the Strathdale site, and
seemingly for other sites, had not been fully developed and finalised. In any event,
the Agreement for Lease was itself finalised and executed.
Events preceding negotiation of Landlord’s Works Costs
94
It is clear that by 1 April 2010, when Rider Hunt reported back to Woolworths, the
amount of the Landlord’s Works Costs then-estimated materially exceeded the
budget that had been approved by the Property Committee on behalf of the
Woolworths Board. As at that date, Rider Hunt’s estimate of Masters’ contribution
stood at $3,247,195,189 whereas the approved budget had been fixed at $1.7 million.190
Mr Champion’s evidence was that Mr Macmillan, who was negotiating with NES on
behalf of Woolworths, was not authorised to agree a Landlord’s Works Costs
amount that exceeded the preapproved budget.191 Mr Champion’s evidence was
that Mr Macmillan was authorised to terminate the Agreement for Lease if the store
could not be constructed for a contribution amount that was within the approved
188
189
190
191
SC:KS
Transcript 1288.
Court Book 3293–4.
Court Book 4490.
Transcript 1148.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
budget.192
As discussed further in these reasons, Woolworths was not free to
terminate the Agreement for Lease on any such basis.
95
On 23 November 2009, Mr Macmillan attended a meeting at the offices of the
Council. Also in attendance was Mr John Panozzo of the Department of Innovation,
Industry and Regional Development, who was assisting Woolworths with planning
amendments for its key Oxygen (Masters) stores, including Bendigo.193
At that
meeting, representatives of the Council said that the Council had a number of
concerns with the proposal to construct a Masters store at the Strathdale site,
including that the site was close to a surrounding residential development and the
Council intended to rezone the land residential. The Council representatives said
that the Council was, however, supportive of a development elsewhere in
Bendigo.194 The following day, the Council sent a letter to Mr Panozzo setting out its
position.195 In that letter, the Council said that it was “keen to assist in getting this
development in Bendigo” and recommended finding a site in the northern parts of
Bendigo, along the Midland Highway. The Council said it had identified a number
of potential sites that it considered to be viable alternatives.196
Following this
meeting, Woolworths formed the view that the Council was not supportive of the
development of the Strathdale site as an Oxygen (Masters) site.197
96
On 19 February 2010, Mr Blake, on behalf of Kennington Village Pty Ltd, asked
Woolworths if it would provide interim funding for a shopping centre development
in Bendigo, which shopping centre was to be constructed by NES and leased to
Woolworths (“the Kennington Village development”). Interim funding was, he said,
required to enable planning amendments requested by Woolworths to be obtained
and then funding to be obtained from Bendigo Bank.198
192
193
194
195
196
197
198
SC:KS
Despite Woolworths
Transcript 1148.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [39].
Court Book 2105–6.
Court Book 2105.
Court Book 2106.
Court Book 3422. Cf the interpretation of this email by Woolworths with respect to termination
which is at odds with the words, content and structure of this email (see Defendants’ Closing
Submissions (3 September 2015) [182].
Outline of Brendan Edward Blake (6 March 2015) [372].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
agreeing to provide the interim funding and entering into a Facility Agreement with
Kennington Village Pty Ltd to advance up to $6,760,165 to Kennington Village Pty
Ltd, with an option to purchase the Kennington Village site,199 the Kennington
Village development ultimately did not proceed because Kennington Village Pty Ltd
was unable to obtain the necessary planning approvals.
97
As a result, Kennington Village Pty Ltd defaulted on paying out or refinancing its
loan from Woolworths and Woolworths exercised its option to purchase the
Kennington Village site. While this default arose as a result of an inability to obtain
planning approvals, and not as a result of any financial difficulties facing
Kennington Village Pty Ltd, Woolworths nevertheless appears to have erroneously
formed the opinion that NES “had funding issues”.200
The evidence of
Mr Macmillan who admitted forming this opinion was that he had no personal
knowledge of, and had not investigated, the Kennington Village Pty Ltd default 201 or
NES’s financial position. Mr Macmillan’s opinion, that NES had funding issues, was
never communicated to NES. Consequently, and for the reasons set out below with
respect to this issue,202 Mr Macmillan’s evidence to the effect that Mr Blake had
advised him that NES had funding issues in relation to the Bendigo development
must be rejected.203 Mr Blake’s evidence that he had made no such statement, and
that funding for the Bendigo development had not been sought because such
funding was premature until planning approvals had been obtained, is to be
preferred, particularly having regard to the particular circumstances affecting the
Kennington Village Development.204
98
From late 2008 or early 2009, but prior to Danks having been acquired by
Woolworths, Danks had embarked upon an expansion strategy (“Project Lion”) that
included a possible alliance with Natbuild, or acquisition of Mitre 10 as well as other
199
200
201
202
203
204
SC:KS
Court Book 4615.
Court Book 3138.
Transcript 648.
See below [230]–[235].
Transcript 661–2.
Transcript 210–1.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
independent home hardware stores.205 Danks’ expansion strategy was constrained
by a lack of capital.206
99
Nevertheless, as part of this expansion strategy, Danks had identified the Hume &
Iser store in Bendigo as a key acquisition target. The Hume & Iser store was the
twelfth largest independent hardware retailer in Australia with annual sales of
around $27.9 million.207 Woolworths also identified the Hume & Iser store as one of
30 priority independent sites for acquisition during its due diligence on Mitre 10,
Danks and others.208
100
By February 2010, before the Vaughan Constructions estimate had been obtained,
but after the binding Letter of Offer had been executed and approval had been
obtained from the Property Committee, Woolworths began incorporating the Danks
business into its own.209 This included incorporating Danks’ expansion strategy.210
This strategy, which included the acquisition of the Bendigo Hume & Iser store, was
inconsistent with the Property Committee decision that had been made to pursue
only one store in Bendigo and to approve the Bendigo site.211
101
As a result of the acquisition of Danks, Woolworths’ Home Improvement Strategy,212
not previously referred to, expanded to include medium box retail stores and tradefocused retail.213 The strategy expressly contemplated Woolworths protecting and
growing Danks’ key Home Timber & Hardware store customer base214 and avoiding
or minimising competition (described as a “clash of trade” or “cannibalisation”)
between Oxygen and trade focussed retail stores.215
Where competition was
unavoidable, for example if Woolworths was to acquire a large trade player such as
Dahlsens, various strategies were identified by Woolworths to minimise
205
206
207
208
209
210
211
212
213
214
215
SC:KS
Court Book 4331.
Court Book 4508.
Court Book 930, 4394.
Court Book 4448.
Transcript 1108.
Transcript 1107.
Court Book 1231.
Transcript 1109.
Court Book 4715.
Court Book 4722, 4724, 4738.
Court Book 4724.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
competition. These strategies ranged from offering incentives to the key Home
Timber & Hardware stores to maintain their relationship with Danks, to cutting back
the trade offering of Oxygen stores in metropolitan areas where there were trade
focussed retail stores, to sharing advertising costs, to choosing between having an
Oxygen store or a trade focussed store in a particular catchment.216 Where incentives
were offered, the level of incentives offered by Woolworths to Home Timber &
Hardware stores the subject of competition from Oxygen stores would depend on
the size, strategic importance and circumstances of the affected Home Timber &
Hardware store.217
102
Woolworths placed particular importance in its Home Improvement Strategy on
protecting Danks’ key Home Timber & Hardware customers in regional or country
areas who were being targeted by competitors.218 An exception was made to the
Woolworths strategy of not acquiring any small box retail operations in Oxygen
(Masters) catchment areas, where it was desirable to do so as “a defensive play to
protect a key Home [Timber & Hardware] member being targeted by a
competitor”.219 Where a key Home Timber & Hardware store fell within a potential
Oxygen catchment area in a regional or country area—as was the case in Bendigo—
the strategy was to “jointly agree whether the market was suitable for an Oxygen or
trade focussed retail store and proceed accordingly”.220 That is, to choose whether
the trade focussed store or the Oxygen (Masters) store was to be supported.
103
By late February 2010, discussions had taken place between Mr Stephen Iser, the
director of Hume & Iser, and Mr Graeme Danks of Danks Holdings. During those
discussions, Mr Iser advised Mr Danks that he had previously had discussions with
Bunnings, had signed a confidentiality agreement with Bunnings and had shared the
Hume & Iser financials with Bunnings.221
216
217
218
219
220
221
SC:KS
Court Book 4724.
Court Book 4724.
Court Book 4722, 4724, 4738, 4743.
Court Book 4724.
Court Book 4724.
Court Book 3421.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
104
It appears that the acquisition of Hume & Iser by Bunnings would have presented a
significant potential problem for Woolworths and Danks in that the Strathdale site
was within 10 kilometres of the Hume & Iser store in Bendigo. As a result of the
undertakings given to the ACCC, the Hume & Iser store would be guaranteed access
to Danks products at the same price as other independent stores and would be free
to terminate its agreement with Danks and could terminate that agreement at any
time, free of consequence, in order to compete with the Oxygen (Masters) store. As
Masters was one of Danks’ largest customers, losing the Hume & Iser store—which
had nearly $30 million in annual sales—to Bunnings would have significantly
undermined Woolworths’ strategy of strong competition with Bunnings in key areas
like Bendigo and depriving Wesfarmers of cash-flow from Bunnings, at least in the
Bendigo region.
105
On 9 March 2010, well before the Rider Hunt open book review had been completed,
Mr Danks along with Mr O’Brien from Woolworths222 and others met with Mr Iser to
discuss the potential purchase of the Hume & Iser store by Danks.223 Shortly after
this meeting, but still before the open book review had been completed, the status of
the Strathdale site following the Woolworths Property Committee meeting that day
had changed to “Alternative site being pursued. Check legal position in relation to
negotiation on site”.224 Woolworths offered no explanation as to why Mr O’Brien
was not called to give evidence in this proceeding about the substance of the critical
9 March 2010 meeting, despite the fact that this meeting appears to be the origin of
the decision to pursue the alternative Hume & Iser store.
106
On 12 March 2010, Mr Danks emailed Mr David Hunt of Woolworths Shared
Services.
In this email, Mr Danks said that a person from Mitre 10 had been
spreading a rumour amongst Danks’ retail customers—that is, independent
hardware stores in Bendigo including the Home Timber & Hardware store at the
Hume & Iser site—that Woolworths had purchased a site in Bendigo to construct an
222
223
224
SC:KS
Court Book 3085.
Court Book 3421.
Court Book 3138, 3134, 3141–2.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Oxygen store. Mr Danks said to Mr Hunt that the site in question could have been
purchased by another division of Woolworths and that he would very much like to
“squash the rumour and put the b…h from Mitre 10 back in her box”.225
107
On 16 March 2010, Mr Hunt forwarded the email from Mr Danks to Mr Macmillan,
along with the question “Do you know if supermarkets or anyone are looking at this
site?”226
In actual fact, Woolworths was not pursuing that site for an Oxygen
(Masters) store in Bendigo.
108
No correspondence has been discovered by Woolworths between Mr Macmillan and
Mr Danks for the period from 17 March 2010 to 23 April 2010. It is clear, however,
from the email correspondence on 24 April 2010, which was still prior to the
termination of the Agreement for Lease by Woolworths, that there had been
telephone communications between Mr Danks and Mr Macmillan and that
Woolworths was willing to walk away from the Bendigo site as “the preference is to
progress the Hume & Iser site as an Oxygen site as this site has a better location
and … would be supported by Council”.227
Discussions regarding Masters’ contribution to Landlord’s Works Costs
109
NES obtained an estimate to construct a 10,535 square metre hardware store to
Bunnings specifications on 9 October 2009.228 The estimate provided to NES was
$780 per square metre plus GST which was based on a 2,100 millimetre concrete
dado wall with metal clad elevations, but subject to some exclusions. The estimate
of $8,467,300 plus GST included a full height precast building.229 This estimate was
obtained from Troons, a company whose experience included constructing 42
Bunnings stores around Australia. A second estimate to construct a store to the
Bunnings specifications was obtained from Vaughan Constructions in February
225
226
227
228
229
SC:KS
Court Book 4675.
Court Book 4675.
Court Book 3421. Cf the interpretation of this email by Woolworths with respect to termination
which is at odds with the words, content and structure of this email: Defendants’ Closing Submissions (3
September 2015) [182].
Court Book 1844.
Court Book 1844.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
2010. This Vaughan Constructions estimate was $785 per square metre; an estimate
which was within $5 per square metre of the Troons estimate obtained on 9 October
2009.230 On 16 February 2010, NES adjusted the Troons estimate to reflect a store
area of 10,738 square metres, which resulted in an estimate to construct an
equivalent Bunnings store on the Strathdale site of $8,375,640 plus GST for a full
height precast building.231
110
The final version for the design plans and specifications for the Bendigo Masters
Store was completed by Woolworths in January 2010.232 The completion of this final
version of the design plans and specifications enabled further estimates to be
prepared. Thus, on 1 March 2010, Vaughan Constructions provided NES with a
quote to construct a Masters store at the Strathdale site in Bendigo based on
Woolworths’ final specifications. That quote was $12,348,061 plus GST for a 10,923
square metre store; being the 10,738 square metre store contracted for plus a 185
square metre first floor equipment area.233 Mr Macmillan’s evidence was that he did,
on 1 March 2010, receive an email from Mr Blake attaching this Vaughan
Constructions quote.234
111
NES, in its submissions, points to the significance of this, indeed any estimate, in the
present context by Vaughan Constructions having regard to its success in winning
the construction contracts for the first six Masters stores in Victoria, which were
located at Braybrook, Burnside, Coolaroo, South Morang, Dandenong and
Keysborough. Mr McDonald of Rider Hunt gave evidence that Rider Hunt was the
quantity surveyor or cost consultant in respect of various Masters stores which were
built by Vaughan Constructions and that all negotiations with Vaughan
Constructions in respect of those stores were satisfactorily concluded.235 Indeed,
Mr McDonald described Vaughan Constructions as a leading commercial builder
230
231
232
233
234
235
SC:KS
Court Book 3016.
Court Book 211.
The specifications consisted of Design Brief Revision B (Court Book 1982), Construction Brief Revision
D (Court Book 2112) and Site Plan SK04 (Court Book 1773).
Court Book 3001, 3020.
Court Book 3017, 3018–34, 4012.
Transcript 1273–4.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
with which he got on well.236 Vaughan Constructions was, however, not called by
any party to these proceedings.
Mr Blake’s evidence was that Vaughan
Constructions was unwilling to give evidence against Woolworths in the
proceeding.237 In this respect, NES submits that this is perhaps not surprising, given
the relationship between Woolworths and Vaughan Constructions, the latter having
obtained approximately $97 million of work from Woolworths.
112
From the perspective of Woolworths at about this time, and prior to receiving any
information from NES, they had received estimates from Rider Hunt for the
construction of a generic Masters store constructed to Design Brief Rev B, being for:
(a)
a 13,465 square metre store that would cost $12.1 million, or $899 per square
metre;238 and
(b)
a 13,676 square metre store that would cost $12 million, or $877 per square
metre.239
113
On 2 March 2010, Mr Blake received an email from Mr Jordan Grigg of Vaughan
Constructions in which the latter raised with Mr Blake queries about the inclusion of
the site works costs in the Vaughan Constructions estimate for the Strathdale site,
pointing out that this made that estimate appear “expensive” compared to a quote
they had provided to Woolworths for another store.
Mr Grigg included an
attachment to his email which he urged Mr Blake to consider, so that he could
understand the difference in the sites works costs made to the estimates. This email
is, of course, indicative of communications between Mr Blake and Vaughan
Constructions, which is hardly surprising in the circumstances of this matter, but
does not, in my view, provide evidence of any agency relationship as between
Vaughan Constructions and NES, and nor does it cast any doubt on the bona fides of
the estimate of construction costs and, hence, Landlord’s Works Costs on the part of
236
237
238
239
SC:KS
Transcript 1271, 1273.
Transcript 154.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [7]; Court Book 2194, 2296.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [9]; Court Book 2759, 2844.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
NES in spite of inferences to the contrary which Woolworths seek to draw.240
114
In any event, on 3 March 2010, NES provided to Mr Macmillan its estimate of
Landlord’s Works Costs, in the following terms (omitting formal parts of the letter
from Mr Blake to Mr Macmillan):241
Strathdale Home Improvement Centre
Landlord’s Works Costs Estimate
We write regarding our recently provided Vaughan Constructions Pty Ltd
cost estimate for the construction development of the Strathdale Home
Improvement Centre and to complete our obligations under Sec. 2.2(a)(i)–(iii)
of the Strathdale (Bendigo) Agreement for Lease and Lease.
We have determined and provided the open book costing of the Landlord’s
Works Costs.
We confirm the construction estimate is based on the plan SK04 as attached to
the Agreement for Lease. The cost estimate is:
$12,348.061.000 plus GST.
Under the provision of the Woolworths Letter of Offer of 2 June 2009 (item
13) we confirm the construction estimate for an alternative trade supply
development for this site is:
$8,375,640.00 plus GST.
Accordingly we confirm the lump sum contribution the tenant is required to
contribute to the Landlord’s Works Costs is:
$3,972,421.00 plus GST.
Please confirm your acceptance of the Tenant’s works costs for this
development.
We look forward to receiving your response.
115
It might have been thought that, having regard to the estimates which NES had
obtained from two very experienced builders of Bunnings stores who had also been
associated with and undertaken significant work for Woolworths, this estimate and
other estimates provided by NES would have been relatively uncontroversial from
the perspective of Woolworths, and to the extent that there was any issue or
disagreement, that these matters would have been worked through quite
240
241
SC:KS
See, eg, Defendants’ Closing Submissions (3 September 2015) [132]–[133]. See also below [195]–[207].
Court Book 3077 (emphasis in original).
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
expeditiously and constructively. At least this is, in effect, the position advanced by
NES.242
116
In light of the construction adopted by Woolworths with respect to the operation of
cl 2.2 of the Agreement for Lease, they characterise the estimate of construction costs
and, consequently, Landlord’s Works Costs provided on 3 March 2010 as a
“determination” for the purposes of those provisions, particularly cl 2.2(a)(i) of those
provisions. Having characterised the 3 March 2010 letter in this way, Woolworths
contend that there were “inconsistencies” with the “determination” provided by
NES, a contention in this respect which appears to embrace dealings between the
parties from 3 March 2010 up until the meeting on 22 April 2010, which is discussed
in further detail in the reasons which follow.243 I turn now to consider events from 3
March 2010 until the 22 April 2010 meeting, both from the perspective and
characterisation placed on those events by Woolworths, and also the characterisation
put on the same or related events by NES, which characterises them as variously a
process of revision and explanation of estimates and events as part of the “open
book” process contemplated by cl 2.2 of the Agreement for Lease.
117
The first criticism made by Woolworths in relation to the estimates provided by NES
on 3 March 2010 is that the source of the estimate for alternative trade supply
development was not stated, but was based upon an estimate provided by Troons,
as set out in the email to Mr Macmillan dated 1 March 2010.244 Additionally, it is
said that there were two further inconsistencies with the “determination” provided
by NES:
(a)
the rate of $780 per square metre used by NES was the rate that Troons had
estimated for a building without full height precast panels, 245 whereas the
Masters design brief required such panels.246 As noted above,247 Troons had
242
243
244
245
246
247
SC:KS
See, eg, Plaintiff’s Closing Submissions (3 September 2015) [60].
See below [158]–[165].
Court Book 3017.
Court Book 1844; Transcript 255.
Transcript 255.
See above [90].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
told Mr Blake that such panels would add $250,000 to $300,000 to the price,
meaning that the rate with the panels was actually between $804 per squre
metre and $808.50 per square metre.248 By using the Troons rate that did not
include full height precast panels, NES undervalued the price for the
comparable store and thereby increased the contribution sought from Masters
by that amount;249 and
(b)
NES used a store size of 10,738 square metres for the comparator store (as
provided for by the Agreement for Lease), but the Masters store designed by
Vaughan Constructions had a total enclosed area of 10,923 square metres.250
This was not an “apples to apples” comparison and, again, had the effect of
inflating the amount of the contribution sought by NES. In order to compare
like with like, either the rate for the Masters store would have to be calculated
on the size stipulated by the Agreement for Lease, or the comparator store
would have to be calculated on the Vaughan Constructions-designed size.251
Additionally, Mr Macmillan received from Vaughan Constructions, on 3 March
2010, a quote for a proposed Masters store at Hawthorn at a rate of $1,047.74 per
square metre.252
118
Woolworths submit that after Mr Macmillan received a copy of Vaughan
Constructions’ estimate for the Strathdale store by email on 1 March 2010 253 and the
first of the, so-called, NES “determinations” on 3 March 2010,254 he quickly formed
the view that the estimate of the Landlord’s Works Costs was higher than
248
249
250
251
252
253
254
SC:KS
Transcript 256–7.
Transcript 257. While Troons later provided an email that, on its face, quoted $780 per square metre
with full height panels, Mr Troon accepted this was probably a mistake: Transcript 514. There was no
attempt to clarify why there was a discrepancy between the two Troons quotes. Mr Troon provided a
further price on 17 March 2010 in which he added $200,000 for the full height panels: Court Book
3156; Transcript 515–6. Mr Blake said that he assumed the additional $200,000 was for the full height
panels (Transcript 282), which, Woolworths submit, means that Mr Blake knew the rate of $780 per
square metre did not include such panels.
Court Book 2978; Transcript 258.
It is to be noted that in their memorandum of 22 April 2010, Rider Hunt adopted the latter approach:
Court Book 3883.
Court Book 3074; Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [76].
Court Book 3017–34.
Court Book 3076–7.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Woolworths’ expectations.255 Mr Macmillan’s evidence in this respect was, it is
submitted, based principally on a comparison with:
(a)
the estimate provided by Rider Hunt on 10 December 2009 for a 13,465 square
metre Masters store, which Rider Hunt estimated at $12,104,254, or $899 per
square metre.256 This compared to Vaughan Constructions’ 1 March 2010
estimate for a 10,923 square metre store of $12,348,061, or $1,130 per square
metre;
(b)
an estimate provided by another quantity surveyor used by Woolworths—
Slattery—who had estimated a build cost of $11,950,000 for a 13,500 square
metre store,257 or $885 per square metre; and
(c)
the email that Mr Macmillan had received from Vaughan Constructions on
3 March 2010, which provided a quote for a proposed Masters store at
Hawthorn at a rate of $1,047.74 per square metre.258
Mr Macmillan said in his evidence that, as a result of noting these and other matters
which he described as discrepancies,259 on or about 3 March 2010 he arranged for
Mr Bob Killesteyn, Woolworths’ Construction Manager, Mr McDonald and Mr
Grigg to meet to review the NES “determination” of the Landlord’s Works Costs in
detail.260 It is said that this process met with Mr Blake’s approval. The basis of this
submission is an email of 12 March 2010 from Mr Blake to Mr Macmillan which,
omitting formal parts, is as follows:261
Thank you for arranging the meeting with Jordan Grigg allowing your team
to view the “open book” constructing costing as provided by Vaughan
Constructions for the Bendigo Home Improvement centre. I am advised that
255
256
257
258
259
260
261
SC:KS
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [71]–[75].
Court Book 2194, 2296.
Court Book 2295; Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [72(c)]; Transcript
692.
Court Book 3074; Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [76].
An example given is Vaughan Constructions’ design being larger than the size stipulated in the
Agreement for Lease, and the “cost saving” alternatives proposed by Vaughan Constructions which
Woolworths regarded as unsatisfactory.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [77]. Cf Defendants’ Closing
Submissions (3 September 2015) [145].
Court Book 3090.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
there is a subsequent meeting arranged for Tuesday 16th March to finalise the
inspection.
I would be grateful if you could advise me of any costing issues that do not
accord with WOW’s expectations or any amendments to the Design Kit that
may influence the construction cost.
We have not received any information relating to the project from you for
some time.
I would also appreciate an update to the progress with the Planning Minister
as I have not received any information on this matter either.
Looking forward to hearing from you.
It is clear from this email that the process did meet Mr Blake’s approval but, as the
email indicates, it is clearly approval of a process of open discussion and inquiry in
which Mr Blake maintained involvement and not, as Woolworths would have it, a
process in the hands merely of Woolworths, Rider Hunt and Vaughan
Constructions.
119
Continuing, Woolworths submit that:262
NES had not, however, as Mr Blake accepted,263 provided with its
determination its open book costing of the Landlord’s Works Costs. On 9
March 2010, therefore, Mr Blake instructed Vaughans to provide “all the
costings to WOW, not just the final figures, or alternatively, access to the
workings by WOW in the likely event they will ask their assessors/QS to
view the file.”264
The document relied upon in this submission is an email from Mr Blake to
Mr Matthew Vaughan, copied to Mr Grigg, dated 9 March 2010 which, omitting
formal parts, is as follows:265
Costs Estimate under the WOW AfL
Sec. 2 (a}(ii)
Last week I provided Woolworths a copy of your WOW Home Improvement
Centre estimate in accordance with our AfL provision Sec. 2.2 (confidential
extract attached).
I was today advised by my lawyers that my letter to WOW lacked the
necessary detail to properly comply with the requirement of Sec. 2.2.
262
263
264
265
SC:KS
Defendants’ Closing Submissions (3 September 2015) [139] (emphasis omitted).
Court Book 3083.
Court Book 3083.
Court Book 3083.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Item 2.2 (a)(ii) required the Landlord to provide its costing on an “open book”
basis. The estimate I provided WOW is not considered to be “open book”. I
am advised that in order to properly fulfil the requirements I am required to
provide all the costings to WOW, not just the final figures, or alternately,
access to the workings by WOW in the likely event they will ask their
assessors/QS to view the file.
Letter of Offer
Our Letter of Offer from WOW for this site requires us to ascertain the
construction price of a comparable dimensioned “warehouse style hardware
store, (full height pre-cast)” e.g. Bunnings and use that base cost to establish
any amount the Tenant is required to contribute to the construction under Sec
2.2 (a)(iii) as the difference between the “Bunnings style” base cost and the
WOW cost.
The current estimate provided by Vaughan allows a range of options not
currently provided under our current comparable hardware store estimate.
Could you please therefore remove the following items from your estimate
and provide a fresh estimate with these items separately itemised:
-
Power authority head works; and
-
Site levelling with a fall greater than 300mm across the site.
This will assist us in providing comparable estimates.
Comparable Estimate
If you are able would you please assist us by providing a comparable D & C
estimate for an “alternative hardware warehouse” e.g. Bunnings using the
WOW site plan and external dimensions on the following basis:
-
Warehouse of total dimensions 10,738m2 on a 24,700m2 site;
full height pre cast panels;
full architectural documentation;
DA application costs excluded;
power authority head works excluded;
fall no greater than 300mm across the site.
Could you also advise if you are comfortable providing the “open book”
costings for WOW’s inspection.
Please contact me if you have any questions.
In my view, a reading of the whole email in context does not support the
submissions made by Woolworths in support of their contention that NES had failed
to provide open book costings at odds with the requirements of cl 2.2 of the
Agreement for Lease. Rather, in my view, the open book discussion process was one
which was contemplated in the email of 12 March 2010 from Mr Blake to Mr
Macmillan which is set out above.
SC:KS
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
120
In my opinion, this view of the discussions and email correspondence of 9 and
12 March 2010 to which reference has been made is supported by other events and
correspondence around this time. In particular, on 10 March 2010, Troons confirmed
that the cost to construct a Bunnings store using the Woolworths dimensions
remained at $780 per square metre266 or $8,375,640 plus GST. That estimate by
Troons was later revised by it, based on the Woolworths site plan and dimensions, to
$8,575,640 plus GST, or approximately $798 per square metre.267
Vaughan
Constructions also revised its estimate to construct a Bunnings store based on the
Woolworths site plan and dimensions to $8,733,070 plus GST based on a 10,738
square metre store, or $813.29 per square metre.268 The evidence of Mr McDonald
was that Rider Hunt was never provided with, and did not review, the cost to
complete an equivalent Bunnings store that had been provided by Troons. Indeed,
Troons did not participate in the open book process. Instead, Rider Hunt (who was
not a builder) and Vaughan Constructions (who had far less experience at building
Bunnings stores than did Troons) applied a cost to construct a Bunnings store of
$8,733,070.269
If applied, this assessment would have resulted in a Masters
contribution of $2,783,739.
121
In terms of the open book process, contrary to the position put by Woolworths, NES
contends that the process was conducted. On 9 March 2010, NES requested that
Vaughan Constructions make the calculations of its quote to construct the Bendigo
Masters store available to Rider Hunt, the quantity surveyor retained by
Woolworths to review the quote.270 This is in fact the email of this date between Mr
Blake and Mr Vaughan, copied to Mr Grigg, which is set out in the preceding
paragraphs. NES submits that the open book review process did commence on 12
March 2010 with a meeting between Vaughan Constructions, Woolworths and Rider
Hunt271 and that the open book review ended on 1 April 2010 when Rider Hunt
266
267
268
269
270
271
SC:KS
Court Book 3086.
Court Book 3156.
Court Book 3130.
Court Book 3130.
Court Book 3083.
Court Book 3119.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
reported back to Woolworths.272 NES says that at the conclusion of the open book
review process, Rider Hunt estimated that the Landlord’s Works Costs that would
be payable was $3,247,195, as set out in an email dated 29 March 2010 from Mr
McDonald to Mr Killesteyn, copied to Mr Macmillan, which, omitting formal parts,
is as follows:273
We have reviewed the submission from Vaughans detailing the cost
difference from the Bunnings store at Coburg and the proposed Project
Oxygen store at Bendigo and note the following issues;

The Bendigo store is 10,923m2

The Coburg store upon which the comparison is made was built to a
2002 brief. We have not sighted this brief.

The Project O amenities, administration, mezzanine is 828 m2
compared with the Coburg store at 354 m2. The majority of the
mezzanine cost difference (item 54) in the attached comparison exists
because of the extra area. We question whether this is correct
methodology as the rent may be struck on the area of the store which
would then include for this extra cost.

The cost difference includes $200k for light fittings. We understand
that this item will now be supplied by Oxygen.

Item 59 is the provisional sum for the floor finish at $30/m2. This
does not reflect our understanding of the cost of the current floor
specification but is in accordance with the information used by
Vaughan.

A cost has been included for plant platform screens, these may not be
required. We don’t have them on Braybrook & Coolaroo but may be a
planning issue for this site.
The section highlighted in yellow on the attached spreadsheet is our view of
the split of the extra cost between base build, site related costs, fitout and
authorities fees.
The total difference is $3,247,195 inclusive of additional Preliminaries &
Supervision, design fees (2.5%) and builders margin (5%). This has not been
finally agreed with Vaughan yet.
This cost difference was materially greater than the revised contribution amount that
NES had sought from Woolworths of $2,941,169.274
272
273
274
SC:KS
Court Book 3296.
Court Book 3293.
Court Book 3288, 3343.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
122
On 31 March 2010, Mr Blake received a telephone call from Mr Macmillan. In this
conversation Mr Macmillan again said that the Vaughan Constructions estimate was
not acceptable, yet again failed to provide any explanation as to why. Mr Macmillan
did not identify any specific issue with the Vaughan Constructions estimate and
offered no alternative. Mr Blake offered to obtain quotes from other builders if
Woolworths could identify any who would be prepared to quote for the work. No
such names were ever provided by Woolworths to Mr Blake. 275
In the
circumstances, the only explanation for Mr Macmillan stating that the Vaughan
Constructions estimate was “not acceptable” on 31 March 2010, particularly where
the revised NES estimate of 26 March 2010276 was materially less than the 29 March
2010 estimate from Woolworths’ own quantity surveyor, Rider Hunt, is that the
Landlord’s Works Costs still exceeded Woolworths’ approved but undisclosed
budget.
123
The open book review finished on or around 1 April 2010.277 NES was not provided
with any of the reports or documents that had been prepared by Rider Hunt for
Woolworths as a part of that process, including the Rider Hunt estimate of 29 March
2010.278 Mr Macmillan admitted that it would have been reasonable for Woolworths
to provide the reports to Mr Blake and to discuss those reports with him but said
that even at 22 April 2010 the open book process was still ongoing.279 Mr Blake’s
oral evidence suggests that the process concluded earlier, but the contemporaneous
documentary evidence to the contrary is to be preferred.280
124
There are also other communications which, if not part of the open book review
process, at least related to it.
For example, on 16 March 2010, Vaughan
Constructions provided an updated estimate to NES to construct a Masters store at
the Bendigo site with deductions, including for a site in accordance with the
275
276
277
278
279
280
SC:KS
Transcript 417, 713.
Court Book 3288, 3343.
Court Book 3296.
Court Book 3293.
Transcript 961.
Cf Transcript 315. See also Defendants’ Closing Submissions (3 September 2015) [60].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Agreement for Lease.
The revised cost was $11,516,809 plus GST.281
These
amendments were, NES contends, based on discussions that had taken place
between Vaughan Constructions and Rider Hunt during the course of the open book
review process. On 6 April 2010, NES reduced the contribution amount that it
sought from Woolworths accordingly, to $2,941,169 plus GST.282 NES says that this
contribution amount was materially less than the $3,247,195 that Rider Hunt had
estimated at the end of the open book review process, referring to the email of
29 March 2010 which is set out in the preceding paragraphs of these reasons. NES
submits that this contribution amount ought to have been accepted by Woolworths,
but it was not.
125
The Woolworths perspective in relation to dealings between the parties during this
period is somewhat different from that put by NES. Woolworths say that the first
meeting between Rider Hunt and Vaughan Constructions took place on 12 March
2010 and that, according to Mr McDonald’s evidence, most of the discussions with
Vaughan Constructions were directed to understanding their offer and that it took
time to “tease out the detail of that and to identify what was included in it”.283
Moreover, it is said that it was not, as put to Mr McDonald, directed to achieving
cost savings or to bring the Strathdale site in at $12 million.284 It is submitted that the
price plan was for a generic Masters store of 13,500 square metres and had no
bearing on the exercise being conducted between Rider Hunt and Vaughan
Constructions for the Strathdale site. Moreover, it is contended that Mr McDonald
was unaware of there being any budget for what Woolworths was prepared to
contribute for the Strathdale site,285 and was given no instructions as to what the
difference should be.286 Mr McDonald’s evidence was that following the meeting on
12 March 2010, he received from Vaughan Constructions and reviewed a copy of the
Vaughan Constructions proposal of 1 March 2010, a proposal containing their
281
282
283
284
285
286
SC:KS
Court Book 3130.
Court Book 3345.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [77].
Transcript 1286–9.
Transcript 1290–1.
Transcript 1325—this being a proposition that was not put to Mr Macmillan.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
calculation of the Landlord’s Works Costs,287 noting a number of aspects of it that
did not accord with his understanding of what ought to be included in that
calculation.
126
As observed in the Woolworths submissions, Mr Grigg reported to Mr Blake on the
outcome of this first meeting, including that a further meeting had been arranged for
16 March 2010. The report was contained in an email from Mr Grigg to Mr Blake
sent on 12 March 2010, an email which also contains a list of the topics discussed at
the 12 March 2010 meeting, in the following terms (omitting formal parts):288
Confirming our discussion today, Vaughans held an initial discussion
meeting at our office this morning at Bam with Woolworths (Bob Killesteyn)
and Rider Levett Bucknall (Ewan McDonald).
At this meeting we discussed the following topics:
1. Breakup of current price for Bendigo
2. Treatment and estimate of site specific costs
3. Recommended design changes to cater for site levels
4. Identified cost differences between Woolworths Hardware and Bunnings
specification (eg. $3m extra over cost on base building)
5. Open book discussion (at high level) regarding these individual extra over
costs
6. Mechanism for undertaking detailed assessment and open book review of
extra over cost differences between Woolworths expectations and Vaughan
identified items.
7. Developer/Woolworths date for final sign off being 20th April and
programme of how to ensure fast tracked process is implemented to enable
agreement on final extra over cost difference well before this date.
We confirm a meeting has been scheduled at our office on Tuesday 16th
March at 3:30-4pm to undertake the detailed “open book” assessment and we
will report to you following completion of this meeting.
Please feel free to contact me with any queries.
This email was, in turn, forwarded to Mr Macmillan by Mr Blake later on the night
287
288
SC:KS
Court Book 3018, 4012.
Court Book 3094–5.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
of the same day, together with the following email (omitting formal parts):289
Thank you for arranging the meeting with Jordan Grigg allowing your team
to view the “open book” constructing costing as provided by Vaughan
Constructions for the Bendigo Home Improvement centre. I am advised that
there is a subsequent meeting arranged for Tuesday 16th March to finalise the
inspection.
I would be grateful if you could advise me of any costing issues that do not
accord with WOW’s expectations or any amendments to the Design Kit that
may influence the construction cost.
We have not received any information relating to the project from you for
some time.
I would also appreciate an update to the progress with the Planning Minister
as I have not received any information on this matter either.
Looking forward to hearing from you.
This email was, as also observed in the Woolworths submissions, the first of four
requests for information that were emphasised by NES.290
127
Concluding its submissions in relation to this 12 March 2010 email correspondence,
Woolworths contend that:291
Manifestly, however, there was nothing of substance for Mr Macmillan to
respond to or report on until the discussions between [Rider Hunt] and
[Vaughan Constructions] produced something to report.
This submission is consistent with the Woolworths approach to the construction of
cl 2.2, namely that NES was to provide a “determination” of Landlord’s Works Costs
and that until then, there was no obligation on Woolworths to take part in any open
book process consistently with obligations under the Agreement for Lease and the
Letter of Offer. For the reasons discussed elsewhere in these reasons for decision, I
do not accept this position and, more particularly, am of the view with respect to the
events now being considered, that the email correspondence and the 12 March 2010
meeting were steps and events consistent with a proper interpretation of the
requirements of cl 2.2 of the Agreement for Lease. As discussed in further detail
elsewhere, it was then incumbent upon the parties to work through the information
289
290
291
SC:KS
Court Book 3094.
Transcript 696–700.
Defendants’ Closing Submissions (3 September 2015) [142].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
available to them and request additional detail or further information for this
purpose consistent with the “contractual objects”.292
128
An aspect of the process as between the parties in March and April 2010 which is in
controversy is whether Mr Blake was, as he says he was, excluded from the meetings
between Rider Hunt and Vaughan Constructions.293 Mr Macmillan denies telling
Mr Blake he could not attend those meetings and had no recollection of Mr Blake
ever asking to attend.294 Woolworths submit that the evidence of Mr Macmillan in
this respect should be accepted on the basis that it is supported by the
contemporaneous documents and course of events and that, having heard Mr Blake
give evidence, the Court will, no doubt, have formed the view that he is an
intelligent, experienced and forceful businessman who would have insisted he be
allowed to attend these meetings had he wished to. Moreover, it is said that there
would be a paper trail of emails or solicitors’ correspondence concerning the issue if
Mr Blake’s insisting on his right to attend these meetings had been rejected by
Woolworths.
Finally, it is submitted that any suggestion that Mr Blake would
meekly accept being excluded from these meetings is not credible. As I do readily
accept that Mr Blake is clearly an intelligent, experienced and forceful businessman,
it is difficult to accept that he could have been excluded from these meetings had he
wished to attend. This is, however, in my view, not a critical issue and the answer to
these apparently different positions may well be some misunderstanding or faded
recollection as to the then–perceived importance of attendance at these meetings.
The latter is, in my view, supported by the reference in the Woolworths submissions
that it is apparent from Mr Grigg’s report to Mr Blake that Vaughan Constructions
and Rider Hunt were working out for themselves, or at least working through, the
proper calculation of the Landlord’s Works Costs and the cost differences in the
Bunnings specification.295
292
293
294
295
296
SC:KS
Moreover, it is said that both Mr Blake296 and Mr
See above [55].
Outline of Brendan Edward Blake (6 March 2015) [199]; Transcript 250–2.
Further Outline of Evidence of Timothy Stuart Macmillan in Reply (31 March 2015) [20]; Transcript 689.
Transcript 1290.
Transcript 308. See also NES’s oral submissions at Transcript 80.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Macmillan297 conceded that they did not understand the breakdown of the cost items
in a detailed way. As Woolworths say, it appears that they each therefore relied, to a
large extent, on the process taking place between Rider Hunt and Vaughan
Constructions to identify the relevant differences.
I agree that this is hardly
surprising and, as Woolworths submit, “[t]he matters may have been quotidian for
[Vaughan Constructions and Rider Hunt], but plainly they were not for the parties to
this litigation”.298 Consequently, it is difficult to see that Mr Blake would have
gained anything from attending these meetings other than sitting on the side lines,
leaving those more expert and experienced in the process of costing quotes to
continue their discussions and their work.
For reasons discussed elsewhere, it
should be observed that it does not follow on this basis that Vaughan Constructions
must therefore, necessarily, have been acting as the agent of NES in this process.299
129
In relation to the whole process of communications between the parties with respect
to the Landlord’s Works Costs, Woolworths pursue the position, consistently with
the position they advocate with respect to the interpretation of the parties’
obligations under cl 2.2 of the Agreement for Lease, that NES failed to provide its
open book costing. Thus, it is submitted:300
It is also apparent, as Mr McDonald noted,301 that NES’s failure to provide its
open book costing, in apparent breach of its obligation under cl 2.2(a), meant
that much of the time and effort spent by RLB and Vaughans was directed
towards RLB being able to identify the basis for the so-called LWC figure put
forward by NES. This can also be seen by the list of topics identified at this
first meeting, as set out in the email from Mr Grigg to Mr Blake.302
130
The concluding reference to the email from Mr Grigg to Mr Blake is to the email of
12 March 2010, which sets out the topics which were discussed at the meeting held
on that day.
The text of that email, which has been set out in the preceding
paragraphs, sets out a range of matters which might sensibly, in my view, be seen as
an outline of a process adopted by the parties to work through relevant issues for the
297
298
299
300
301
302
SC:KS
Transcript 699, 843, 960.
Defendants’ Closing Submissions (3 September 2015) [144].
See below [195]–[207].
Defendants’ Closing Submissions (3 September 2015) [145].
Transcript 1287.
Court Book 3090.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
determination of the Landlord’s Works Costs in a manner which is consistent with
the parties’ obligations under cl 2.2 of the Agreement for Lease. In my view, it is
difficult to accept that parties seeking to advance the “contractual objects” would
regard these topics or the process inherent in this list as anything but a useful and
constructive way of seeking to reach a position on Landlord’s Works Costs. In my
view, the summary of communications and events from 12 March 2010 until the
meeting on 22 April 2010 as set out in the Woolworths submissions are indicative of
the process which flows from this list of topics and, if anything, indicate an
agreement between the parties that this was a sensible and appropriate way to
proceed. I do not see that process as supporting in any way Woolworths’ thesis that
these communications and events were indicative of a failure on the part of NES
with respect to its obligations under cl 2.2 of the Agreement for Lease. I turn now to
the detail of these communications and events as set out in the Woolworths
submissions which, for these reasons, do, in my view, support the position I have
indicated.
131
Mr McDonald’s evidence was that, instead of reviewing the Vaughan Constructions
estimate or Troons estimate—on which the NES estimate was based—so as to
identify any issues that Woolworths may have had with the calculations or
assumptions contained in it, the first meeting of the open book process, which was
held on 12 March 2010 (at a time when Rider Hunt had received the quotation),
identified the following action items:303
(a)
to consider whether certain design development savings could be achieved;
(b)
to identify the difference in works between a generic “Project Oxygen” store
and a “generic Bunnings store”;
(c)
to ensure that fit-out items that were to be supplied and installed by the
landlord did not form part of the generic base building costs; and
(d)
303
SC:KS
to obtain a list of the differences between “a generic Bunnings… store” and
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [11]; Court Book 3113.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
“the generic Masters Design Brief”.
132
The first step identified by Woolworths in that process was the provision by
Vaughan Constructions on 15 March 2010 of its “extra over” list from a Bunnings
specification that Vaughan Constructions had from a store in Coburg.304 From this
list, Mr McDonald identified a number of items that he considered to be outside of
the Masters brief that Mr Grigg had included in the Vaughan Constructions estimate
of the Landlord’s Works Costs for the Masters store.305
These included power
supply costs of $75,000, water and sewerage costs of $25,000, and fit-out items of
$455,000. In order to assist Vaughan Constructions, on the same day, 15 March 2010,
Mr McDonald sought and obtained permission from Woolworths to send to Mr
Grigg a copy of Rider Hunt’s comparison from December 2009.306 Mr McDonald
also sent to Mr Grigg a list of fit-out items to be excluded from the tenant’s
contribution,307 and an “extra overs” list between the generic Masters brief and a
Masters store to be constructed in Braybrook.308
Later on 15 March 2010,
Mr McDonald wrote to Vaughan Constructions, as part of the generic cost
comparison exercise, identifying fit-out items to be included in a generic Oxygen
(Masters) store, including items that needed to be installed as part of the base
building works, which were to be paid for by Masters. Mr McDonald noted that the
base building price should exclude any fit-out items to be installed during the base
building works and that these were to be identified separately.309
133
On 16 March 2010, a meeting took place between the representatives of Vaughan
Constructions and Rider Hunt. Following that meeting, Vaughan Constructions
provided to Mr Blake, by email, an estimate for the Landlord’s Works Costs that
removed the costs associated with power authority and other authority head work
costs, site levelling and town planning costs, to the amount of $831,252. 310 These
304
305
306
307
308
309
310
SC:KS
Court Book 3109, 3117; Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [14].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [15].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [16]; Court Book 2421, 3111, 3125–6.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [17]; Court Book 3121.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [20]; Court Book 3146, 4234.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [17]; Court Book 3121.
Court Book 3133–6.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
were costs to be borne by NES under the Agreement for Lease and the net effect of
these deletions, if accepted, would be to reduce the Landlord’s Works Costs to
$11,516,809, and the tenant’s contribution to $2,783,739. The effect of this was not,
however, it is said, communicated to Woolworths at this time. In the same email,
Vaughan Constructions also provided to Mr Blake an estimate for an alternative
Bunnings store design of 10,738 square metres for $8,733,070 plus GST, or costing at
the rate of $813 per square metre.311 Mr Grigg provided his further estimates to Mr
Blake “for your negotiations with Woolworths/Bunnings”.312 Woolworths contend
that the reference to “Bunnings” was no doubt no slip. Where this leads, however,
in the context of these proceedings is not clear, as there is no allegation of any
dealings as between Mr Blake and Bunnings, assuming that there were any, at odds
with the position of NES that it was seeking to fulfil its obligations under cl 2.2 of the
Agreement for Lease.
134
Following the meeting on 16 March 2010, Mr Blake sent an email to Mr Macmillan in
which Mr Blake said he had been advised, presumably by Mr Grigg, that the “open
book” inspection was due to be completed “tomorrow”, that is, 17 March 2010, and
that he looked forward to receiving Mr Macmillan’s comments.313
Woolworths
observe in their submissions that this is the second of the requests for information
given emphasis by NES, but that, clearly, at this point the process between Rider
Hunt and Vaughan Constructions was not expected to complete on 17 March 2010,
no matter what Mr Blake had been told. It is said that it should be inferred that Mr
Grigg updated Mr Blake after this email as to the progress of the process that was
still being undertaken, and that the process would not be ending on 17 March 2010.
It is not clear where this observation leads and, in any event, I do not regard these
communications as being inconsistent with the general position already outlined
with respect to these communications and events as between the parties following
on from 15 March 2010.
311
312
313
SC:KS
Court Book 3133–6.
Court Book 3133.
Court Book 3137.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
135
On 17 March 2010, Mr Blake received an estimate from Troons to “design/construct
the new Bunnings warehouse at Bendigo”.314 This was an estimate for a store of
10,738 square metres for $8,575,640 (plus GST), or costing at $798 per square metre.
This quote was not provided to Rider Hunt.315 It is not clear what significance is
attached to this failure in the context of these proceedings and the ultimate position
taken by Woolworths in the course of dealings with NES. In any event, there is no
suggestion that Rider Hunt is anything but expert in estimating relevant costings, so
I am of the view that this decision or omission on the part of Mr Blake has no
significance in the present context.
136
On or about 18 March 2010, and as part of the cost identification process, 316
Mr McDonald received from Vaughan Constructions a spreadsheet that set out a
comparison between the item costs for a “Bunnings S9 store” and Vaughan
Constructions’ estimate for the Masters store at the Strathdale site and then listed its
assessment of Rider Hunt’s value for certain items and any difference. 317
On
19 March 2010, Mr Macmillan informed Mr Blake that Woolworths were continuing
with discussions with Vaughan Constructions and Rider Hunt, and that Woolworths
hoped to provide further feedback early in the following week.318 However, at about
the same time on 19 March 2010, Mr Macmillan gave written notice to NES that the
contribution amount that had been sought was not acceptable. Again, no attempt
was made to identify any point of difference between the parties or to resolve any
difference in relation to the estimate. Mr Macmillan stated:319
I wish to confirm that the [Landlord’s Works Costs] contribution you require
… is not acceptable. As outlined in your email, we are having continuing
discussions with Vaughan Constructions and our consultants regarding this
matter. We hope to receive further feedback from our consultants early next
week.
As discussed in the preceding reasons, this email was sent after the decision had
314
315
316
317
318
319
SC:KS
Court Book 3156.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [8].
Further Outline of Evidence of Ewen Kenneth McDonald in Reply (31 March 2015) [13(b)].
Court Book 3163; Transcript 1265.
Court Book 3164.
Court Book 3167.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
already been made by the Woolworths Property Committee to pursue the Hume &
Iser site and before the open book review process had been completed. However, in
an email dated 21 March 2010,320 Mr Blake said he would appreciate an update “as to
where you are at regarding the construction costs and the development
contribution”. Woolworths say that this is the third of the requests for information
given emphasis by NES. As to this, Woolworths submit that as Mr Macmillan had
just sent his email on 19 March 2010, a Friday, and Mr Blake sent this further email
on 21 March 2010 at 9.30pm, a Sunday, it was not reasonable to expect that
Mr Macmillan would have anything further to report. In any event, it is said that
Mr Macmillan responded to this further email by an email the following day,
Monday 22 March 2010, in effect repeating what he said in his email of 19 March
2010, that Rider Hunt and Vaughan Constructions were continuing their discussions,
and that he, Mr Macmillan, hoped to be in a position to report later that week, or
early the next week.
137
On 21 March 2010, Mr Blake responded that the planning application could not
proceed until agreement was reached by the parties on the Landlord’s Works Costs,
and that Woolworths’ design specifications may need to be amended to reduce the
cost.
Mr Blake sought an update as to Woolworths’ position regarding the
construction cost and development contribution.321
138
Again, in an email sent on 22 March 2010, Mr Macmillan said to Mr Blake that
Woolworths would not indemnify NES to undertake the planning application prior
to agreeing the Landlord’s Works Costs and that:
In regards to Landlord’s Works Costs, our consultants are continuing to have
discussions with your builder Vaughan’s. We hope to have further feedback
later this week (or early next week at the latest) regarding those ongoing
discussions. As you are aware the Landlord’s Works Costs as indicated by
you are not acceptable to Woolworths.322
139
On 22 March 2010, Mr McDonald received from Vaughan Constructions further
320
Court Book 3170.
Court Book 3170.
Court Book 3183.
321
322
SC:KS
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
information which he says enabled him to confirm that Vaughan Constructions had
included fit-out costs to the value of $455,000 in its estimate for the Landlord’s
Works Costs.323 This is, however, a matter of some controversy between the parties,
though in the overall context of dealings between them—having regard to their
obligations under cl 2.2 of the Agreement for Lease and the ultimate position taken
by Woolworths—it is not a matter of critical importance.
140
By letter dated 26 March 2010, Fetter Gdanski, solicitors for NES, wrote to the
solicitors for Masters setting out NES’s adjusted “determination”—as Woolworths
put it in their submissions—for the tenant’s contribution of $3,772,421.324 Having
regard to the importance and characterisation given to this communication in the
Woolworths submissions, it is desirable to set out the contents of this letter (omitting
formal parts):325
Re: North East Solution Pty Ltd (“North East”) to Shellbelt Pty Ltd
(“Shellbelt”) Woolworths Guarantor
Agreement for Lease dated 24 February 2010 (“AfL”)
Property: 195 Mclvor Road, Strathdale, Victoria
We have been instructed as follows:
1.
that, for the purposes of cl 2.2(a)(ii) of the AfL, your client’s
consultants have been given the opportunity to and did inspect all
records of Vaughan Constructions Pty Ltd, our client’s proposed
builder, to ascertain the basis of our client’s Works Costs of
$12,348,061 plus GST.
2.
that the inspection was completed on Tuesday, 23 March 2010 and,
accordingly, our client has complied with all its obligations under cl
2.2(a)(ii) of the AfL.
3.
that the contribution to the Works Costs our client requires from your
client under cl 2.2(a)(ii) of the Aft. will be $3,772,421 (less the cost of
any earth works and power connection costs to the land which our
client will be happy to estimate on your client’s request).
That is the difference (less those costs) between the Vaughan price for a
building constructed in accordance with your client’s Briefing Kit and the cost
of another building of the kind described in paragraph 13 of your client’s
letter of offer dated 2 June 2009 as a “major trade supply restricted retail
premises (full height precast)” (which our client has ascertained would be
$8,575,640 plus GST not including the aforementioned earth works and
323
324
325
SC:KS
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [21].
Court Book 3288.
Court Book 3288.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
power connection costs).
Our client further instructs us that, in accordance with cl 2.2(b) of the AfL, it
is willing to enter into any discussions in relation to the Works Costs your
client cares to have.
We look forward to hearing from you in due course.
Woolworths submit that while there was an adjustment in this letter to the initial
Landlord’s Works Costs amount by $200,000, to reflect the inclusion of full height
panels,326 the letter simply noted that the contribution will be “less the cost of any
earth works and power connection costs to the land which our client will be happy
to estimate on your client’s request”. It is said in the submissions that it is not clear
why NES did not deduct the price for these matters at this time, as the figure was
readily available from the Vaughan Constructions report of 16 March 2010.327 The
submissions in this respect conclude with the sentence: “To put it mildly, this is
another example of NES’[s] somewhat cavalier approach to the negotiations.”328 In
my view, this characterisation is quite uncalled for, having regard to the content of
the letter, in which context the quoted passage must be viewed, and also in the
context of the dealings between the parties—sophisticated commercial parties which
were well able to discuss and negotiate these type of issues as they would be
expected to do having regard to their obligations under cl 2.2 of the Agreement for
Lease. The Woolworths submissions with respect to this letter conclude with the
comment that it should also be noted that the statement in the letter that NES was
“willing to enter into any discussions in relation to the Works Costs your client cares
to have”, is the fourth and final written request for an update emphasised by NES.329
Continuing, these submissions query how it is put that there was any failure to
respond to this. Again, I repeat the comments or observations just made with
respect to these parties and their obligations under cl 2.2 of the Agreement for Lease.
141
In relation to the 26 March 2010 letter to which reference has been made,
326
Mr Troon provided a further price on 17 March 2010 in which he added $200,000 for the full height
panels: Court Book 3156; Transcript 515–6.
Court Book 3133; Transcript 286.
Defendants’ Closing Submissions (3 September 2015) [156].
Defendants’ Closing Submissions (3 September 2015) [157].
327
328
329
SC:KS
90
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Woolworths note in their submissions that the basis of the tenant’s contribution
figure put forward was the Troons quote of 17 March 2010.
On this basis,
Woolworths further observe that, despite being aware that Vaughan Constructions
and Rider Hunt were engaged in the process to determine the Landlord’s Works
Costs and the difference between the Landlord’s Works Costs and the cost of a
Bunnings store,330 Mr Blake did not, as previously observed, provide this quote to
Rider Hunt.331 Nevertheless, it is said that it was used by NES in the 26 March 2010
letter332 for the “determination” of the tenant’s contribution instead of the higher
Vaughan Constructions estimate provided on 16 March 2010.333 Thus, Woolworths
submit that this was an opportunistic attempt by Mr Blake to “extract” more money
from Woolworths by providing to it an estimate based upon a quote that Troons had
provided for an actual proposal to build a Bunnings store on the site.
Again,
whether or not this observation and the submissions based upon it have any
foundation with respect to Mr Blake’s motives or intentions, it does not affect the
veracity of the process which the parties were undertaking under cl 2.2 of the
Agreement for Lease at this stage, having regard to the experience and expertise of
the entities involved in that process.
142
On 29 March 2010, Mr McDonald sent to Mr Killestyen, and copied to Mr Macmillan,
an email from Vaughan Constructions that attached an amended version of the
spreadsheet he had received from Vaughan Constructions on 18 March 2010.334
Mr McDonald reviewed this Vaughan Constructions spreadsheet and, in his
covering email, noted a number of queries still to be resolved. These included:
(a)
that he had not seen the Bunnings brief that Vaughan Constructions had used
for their comparison. In several cases, therefore, he adjusted the estimate for
Bunnings costs to reflect the Bunnings brief that he was familiar with;335
330
331
332
333
334
335
SC:KS
Transcript 284.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [8].
Court Book 3133.
Court Book 3133.
Court Book 3161.
Transcript 1265.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(b)
whether the correct methodology had been used to account for the cost of the
mezzanine area (valued at $1,145,706);
(c)
whether the costs of the floor finish (valued at $195,930) were correct; and
(d)
whether plant platform screens (valued at $719,935) were required.
Mr McDonald highlighted in yellow on the spreadsheet Rider Hunt’s view of the
correct split between the base build, site fees, fit-out costs and authorities fees. It is
said that it was only the column headed “base build” which was relevant to the
assessment of the Landlord’s Works Costs, with the rest of the items to be excluded
from that amount. Woolworths submit that the sum of the base build column was
$2,573,493.26, but that it was, clearly, subject to resolution of the items the subject of
Mr McDonald’s queries, which totalled over $2 million. It is accordingly wrong to
suggest, as NES does, that this spreadsheet represented some form of “verification”
by Rider Hunt of the amount of the Landlord’s Works Costs or of the Tenant’s
contribution. On its face it was no such thing and, in any event, the evidence
showed that Rider Hunt and Vaughan Constructions continued to exchange
information and to meet. Further, Woolworths submit that it is accordingly wrong
to suggest, as NES does, that this spreadsheet represented some form of
“verification” by Rider Hunt of the amount of the Landlord’s Works Costs or the
tenant’s contribution. On its face, it is said, it is no such thing and, in any event, the
evidence showed that Rider Hunt and Vaughan Constructions continued to
exchange information and to meet.
Mr Macmillan did not consider it a final
figure.336 It was a work in progress.337
143
NES submits that Mr McDonald’s evidence that he “assumed” 338 the $455,000 had
been included (despite asking for339 and receiving a detailed breakdown of fit-out
costs that had been included, which did not include these items 340) is at best
336
337
338
339
340
SC:KS
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [90]; Transcript 910.
Transcript 1289, 1293.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [15(c)].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [27](b); Court Book 3384.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28]; Court Book 338–6.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
implausible and should not be accepted. Either, it is submitted, Mr McDonald
mistakenly believed these items had been included or he well knew they were not
included by Vaughan Constructions but sought to assist Woolworths in its
negotiations by including adjustments for the items anyway (just as he had done by
including adjustments that had already been made and variations, as if they were
existing differences between the parties). In either case, it is submitted, the Court
should find that had Woolworths acted reasonably and in good faith no adjustment
would have been required. For the reasons which follow, it is not necessary to form
a concluded view on these matters.
144
It appears the only adjustment in the 22 April 2010 letter that may have been
warranted was the adjustment for the $123,497 of fit-out works, assuming those
works were not part of the base building works and had been included in the
Vaughan Constructions quotation (which the “Bendigo Fitout Costs” document
suggests may be the case).341
Had that adjustment been warranted, one may
reasonably assume Rider Hunt would have raised this adjustment with Vaughan
Constructions or Woolworths would have raised it with NES.
They did not.
However, even if the contrary was the position, and an adjustment of $123,497 was
to be made, this would result in a contribution by Woolworths of $2,817,672. This
adjustment would have a minor (if not immaterial) impact on NES’s loss and
damage in the proceeding (as set out below).
145
Mr McDonald’s evidence that the $455,000 of fit-out costs was included in the
Vaughan Constructions quotation as it was specified in the Woolworths Design Brief
on which that quote was based342 is, in my view, not correct. The Design Brief343
does not specify any such costs. Nor does the Vaughan Constructions quotation
itself.344
The
“Project
Oxygen—Generic
Base
Building—Provisional
Sum
Schedule”345 on which Mr McDonald purports to rely does not form part of the
341
342
343
344
345
SC:KS
Court Book 3386.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [21].
Court Book 2106.
Court Book 3052.
Court Book 4241.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Design Brief346 or the Vaughan Constructions quote,347 nor was it referred to as
forming part of the design documentation on which the Vaughan Constructions
quotation was based.348 The document has not been proven by any witness. It was
not put to any NES witness. There is no evidence of who produced the document,
when it was produced or what it represents. The document appears to have been
created by Vaughan Constructions349 as part of the exercise of identifying for
Woolworths the cost differences between a generic Bunnings store and a generic
Masters store which listed fit-out items totalling $455,000 as needing to be included
in a generic Masters store (rather than the Bendigo store).
Contrary to Mr
McDonald’s evidence, this document cannot assist the Court in determining whether
Vaughan Constructions included this amount in its quote for the Bendigo Masters
store, particularly where Vaughan Constructions had been advised on numerous
occasions350 that only costs that were to be borne by Woolworths were to be
included. The only evidence of what fit-out costs were included is in a list of fit-out
items in a Vaughan Constructions document headed “Bendigo Fitout Costs”
(printed 14 April 2010),351 which was provided in response to a request for that very
information,352 which does not include the $455,000 amount.
146
In my view, it is clear from Mr McDonald’s own witness statement and from the
contemporaneous documents referred to in it, that the true origin of Mr McDonald’s
belief was in fact an “assumption”353 on the part of Mr McDonald that because the
fit-out amount had been included in an “extra over” list354 and build soft files355
provided to Rider Hunt by Vaughan Constructions, as part of the generic cost
comparison exercise,356 it must also have been included in the Vaughan
Constructions quotation. Even if Mr McDonald had (mistakenly) assumed this, it is
346
347
348
349
350
351
352
353
354
355
356
SC:KS
Court Book 2106.
Court Book 3052.
Court Book 3055.
Court Book 4244.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [11(c)], [17], [19], [27].
Court Book 3386.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [27(b)]; Court Book 3384.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [15(c)].
Court Book 3109, 3117.
Court Book 3159, 3181.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [14], [21].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
difficult to see how Mr McDonald could continue to assume that the fit-out costs had
been included once he specifically requested that Vaughan Constructions provide “a
detailed breakdown of the cost items included in their assessment of the Landlords
Works Costs for fit-out works” for the Bendigo site357 and had been provided with a
break-down that did not include those costs.358 Having regard to these matters,
Mr McDonald’s evidence that he took this response to be “additional” fit-out costs is
simply not credible.359 When these matters were put to Mr McDonald in cross
examination, Mr McDonald admitted that if his account of events was to be
accepted, he had asked for a complete list of fit-out items that had been included but
had been provided with an incomplete list in response.360 When asked why he did
not seek further information if he thought the list was incomplete, Mr McDonald
gave evidence to the effect that there was a common “understanding” (the basis of
which was never disclosed) between Vaughan Constructions and Rider Hunt that
the fit-out amount had been included.361
This evidence is contradicted by
Mr McDonald’s own witness statement in which he states that he “cannot now recall
whether [Vaughan Constructions] mentioned to him that they had used the
Provisional Sums figure from the Design Brief of $455,000 in their assessment.”362
That Mr McDonald’s recollection has improved is improbable. His assertion that
there was some understanding should, for the preceding reasons, be rejected.
147
In any event, it is not necessary to determine whether Mr McDonald in fact
“assumed” the fit-out costs were included in the Vaughan Constructions quotation
or believed the response to his request included only “additional” fit-out costs. If Mr
McDonald did make this assumption or hold this belief he was, in my view, for the
preceding reasons, plainly mistaken. However it follows that if Mr McDonald did
hold this mistaken belief, it would have been corrected readily by NES or Vaughan
Constructions had Rider Hunt or Woolworths raised the proposed adjustment with
357
358
359
360
361
362
SC:KS
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [27(b)]; Court Book 3384.
Court Book 3385–6.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28(a)]; Transcript 1331.
Transcript 1308.
Transcript 1324.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [15(c)].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
either of them; but it was never raised. It would not, however, have altered the
agreed contribution amount which is set out above.
148
Whatever view may be taken of Mr McDonald’s credibility, whatever Mr McDonald
or Rider Hunt may have assumed, there is no evidence that the $455,000 of fit-out
items were included in the Vaughan Constructions quotation or needed to be
removed. Rider Hunt was mistaken in including an adjustment for the $455,000 in
the 22 April 2010 letter, just as Rider Hunt was wrong to include the out of date
quotation, adjustments that had already been made and variations.
Had
Woolworths and Masters acted reasonably and in good faith, the agreement that
would have been reached as to the Landlords’ Works Costs and Masters’
contribution would not have included the adjustments and variations in the 22 April
2010 letter. The only adjustment in the 22 April 2010 letter that may have resulted in
any reduction in Masters’ contribution was the adjustment of $123,497 for fit-out.
That adjustment was never raised with Vaughan Constructions and therefore cannot
be properly tested. If it were the case that the Landlord’s Works Costs should have
been reduced by this amount, the evidence of Mr Blake was that he would have
accepted the lesser contribution amount.363
The adjustment makes no material
difference to NES’s loss and damage in the proceeding.
149
In my view, the contents of this spreadsheet and the debate between the parties as to
its contents and the relevance and significance of its contents simply serves to
highlight that it was a document prepared in the course of the process of discussion
between, particularly, Rider Hunt and Vaughan Constructions as part of the settling
of the Landlord’s Works Costs in the context of the process adopted by the parties
for the purposes of cl 2.2 of the Agreement for Lease. Indeed, this is, in my view,
confirmed by the evidence in that Mr McDonald readily agreed that a number of the
outstanding items from the line by line exercise with respect to the Vaughan
Constructions spreadsheet of 18 March 2010 had not been discussed with Vaughan
Constructions or resolved with them.364 This was because, however, a different
363
364
SC:KS
Outline of Brendan Edward Blake (6 March 2015) [232].
Transcript 1295–8.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
approach was subsequently adopted by Rider Hunt and Vaughan Constructions to
identify the cost difference—the so-called “macro-level” approach of comparing the
overall cost of a Bunnings store with the Vaughan Constructions estimate of the
proposed Masters store and deducting from that the items that ought not to have
been included in the Vaughan Constructions estimate for the Masters store.365 This
macro approach was first used by Vaughan Constructions and then adopted by
Rider Hunt.366 On 31 March 2010, Mr Grigg wrote to Mr Blake confirming that Rider
Hunt may still require further information, for example, a bill of quantities, in order
to assess the “base hardware store”.367 Apart from this particular aspect of this
email, its contents are also indicative of and, in my view, can describe consistently
with previous correspondence and events the process agreed and adopted between
the parties for the purpose of calculating the Landlord’s Works Costs under cl 2.2 of
the Agreement for Lease. Omitting formal parts, the email is as follows:368
To confirm our earlier discussions, quantity surveyors Rider have completed
their “open book” assessment of your project and are reporting to
Woolworths tomorrow.
I have spoke [sic] to Ewan McDonald this afternoon who confirmed
Vaughans cannot do anymore [sic] at this stage without Riders further
instruction from Woolworths. He mentioned there may be a need to further
assess the “base hardware store” bill of quantities benchmark inclusions. I
confirmed a BOQ is available for this purpose and we will make available at
our office when requested.
I believe Tim McMillan [sic] is due to call you shortly to discuss “where to
from here” and please feel free to call me if you require any further
assistance.
150
Woolworths submit that:369
On 6 April 2010, Fetter Gdanski wrote to Masters’ solicitors to the effect that
NES’ “determination” of the LWC had been reduced to $2,941,169,370 having
now deducted the $831,252 from its determination of the LWC for the items
referred to in the 26 March 2010 letter.371 This letter also stated for the first time
365
366
367
368
369
370
371
SC:KS
Further Outline of Evidence of Ewen Kenneth McDonald in Reply (31 March 2015) [13(j)]; Transcript 1298–
9.
Transcript 1299–300.
Court Book 3296.
Court Book 3296.
Defendants’ Closing Submissions (3 September 2015) [163].
Court Book 3345.
Court Book 3345.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
that NES required any contribution to the LWC by Masters to be made as a
lump sum at the commencement of construction of the works.372 As noted
above, the LOO was completely silent on when any lump sum was to be paid,
and cl 2.2 of the AFL left the entire question of the manner of payment of any
contribution to be agreed. Given Woolworths’ commercial practice in this
regard and the fact that the timing of the payment had not been raised prior
to this time, Macmillan gave evidence that he was “surprised” at the receipt
of this letter.373
These submissions are consistent with the Woolworths thesis that there needed to be
a “determination” by NES for the purposes of the process under cl 2.2 of the
Agreement for Lease and that until this had been provided, there could be no “open
book” process.
As indicated in these reasons, particularly in the preceding
discussion, the parties had proceeded with a process for determining the Landlord’s
Works Costs for the purposes of these provisions. In any event, turning to the
6 April 2010 letter, it is, in this context, artificial and inaccurate to characterise the
contents of this letter as a further “determination” by NES. It is, rather, simply part
of the continuing communications, oral and written, between the parties for the
purposes of the cl 2.2 process, as its actual contents taken in context do, in my view,
show. Omitting formal parts, the 6 April 2010 letter from Fetter Gdanski is as
follows:374
Re: North East Solution Ltd (“North East”) to Shellbelt Pty Ltd
(“Shellbelt”)
Woolworths Limited (“Woolworths”) Guarantor
Agreement for Lease dated 24 February 2010 (“AfL”)
Property: 195 Mclvor Road, Strathdale, Victoria
Further to our letter to you dated and sent by e-mail on 26 March 2010, we
confirm the following:
1.
Our client’s instructions that your client’s Quantity Surveyor has
apparently sought further information from Vaughan Constructions
Pty Ltd (“Vaughan”) in relation to our client’s Works Costs,
That is entirely a matter for the Quantity Surveyor and in no way
diminishes the fact of completion of our client’s obligations under
cl 2.2(a)(ii) of the AfL to provide an “open book” costing of our client’s
Works Costs. That was done via an inspection of Vaughan’s records
by the Quantity Surveyor, completed on 23 March 2010.
2.
372
373
374
SC:KS
To clarify the matters referred to in para 3 of our letter of 26 March,
Court Book 3345.
Transcript 995.
Court Book 3345 (emphasis in original).
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the earth works and power connection costs referred to in that
paragraph, are approximately $831,252 and, deleting that amount
from the contribution referred to in our earlier letter, the contribution
our client expects from your client will be approximately
$2,941,169.00.
3.
Our client’s instructions that the contribution is to be made by a lump
sum cash payment to our client at the commencement of construction
of the Works.
4.
Our client’s instructions that, if agreement is not reached by 20 April
2010 on the amount of our client’s Works Costs and the contribution
(including the manner of contribution) your client is to make towards
them, our client reserves the right to terminate the AfL under cl 2.2(c).
Moreover, the issue of payment of the lump sum as raised in this letter does not, in
my view, detract from the view that this is simply part of the ongoing
communications and discussions between the parties. Woolworths submit that the
previous inclusion of $831,252 of earth works and other costs in the NES initial
“determination” was an over-inflation of Masters’ contribution to NES’s costs of
building the store.375 It is further submitted that although Mr Blake portrayed this as
being a mistake and one which was later corrected by the removal of those costs,376
Woolworths submit that this was no mistake, given the email of 2 March 2010 from
Mr Grigg to Mr Blake377 that clearly preceded the NES initial “determination”. It is
said that, at the very least, it is another example of the cavalier approach of NES to
the negotiations.
Apart from a reiteration of the “determination” thesis by
Woolworths, I reject these submissions as a proper characterisation of the approach
of NES to the negotiations or, by inference, Mr Blake’s motivations.
These
submissions are simply not supported by the communications and other matters to
which reference has been made.
151
Of course, on 6 April 2010, NES was unaware that Rider Hunt had provided an
estimate to Woolworths which exceeded the contribution amount NES was then
seeking to recover378 or that the Woolworths Property Committee had already
resolved to pursue an alternative site. As to the latter, by 6 April 2010, the Property
375
376
377
378
SC:KS
Defendants’ Closing Submissions (3 September 2015) [164].
Transcript 266–8.
See above [113].
Court Book 3293.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Committee had affirmed its decision of 16 March 2010 to pursue the alternative site
and to “check the legal position in relation to negotiations on site”.379 The Property
Committee had also noted that the deal would “likely fall over”.380
As no
negotiations had yet taken place between NES and Woolworths regarding the
Landlord’s Works Costs, it is submitted the reference to the deal being “likely to fall
over” can only have been a reference to the Rider Hunt estimate of 29 March 2010
materially exceeding Woolworths’ approved but undisclosed budget.
Again, I
observe that Mr Champion admitted that Mr Macmillan had the authority to
terminate the Agreement for Lease in the event that the project could not be
constructed within the approved budget.381
152
On 8 April 2010, Vaughan Constructions provided to Rider Hunt a “consolidation”
of their original estimate, confirming the deduction of the site-specific items to the
value of $831,252.382 Mr McDonald could not recall whether he requested these
items be removed.383 Woolworths submit that the clear inference is that they were
removed as a result of the discussions and information exchanged between Rider
Hunt and Vaughan Constructions. I accept that that is clear and demonstrative of
the process adopted by the parties for the purposes of cl 2.2 of the Agreement for
Lease. The Woolworths submissions continue, however, with the sentence: “As Mr
Grigg had anticipated in his email of 2 March 2010 to Mr Blake, questions about
these matters were ‘obvious’.”384 If this last sentence is meant to convey a negative
inference as to the approach to negotiations of NES or Mr Blake, it is not an inference
which, in my view, is established, having regard to the communications and events
to which reference has been made. In particular, the reference to the 2 March 2010
email is not, in my view, justified in this overall context or, indeed, in the context of
that email, the contents of which have already been described.385
Of course,
questions will be raised, the process adopted by the parties for the purposes of cl 2.2
379
380
381
382
383
384
385
SC:KS
Court Book 3351, 3355, 3358.
Court Book 3348, 3357.
Transcript 1085.
Court Book 3367. See also Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [13], [25].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [26].
Defendants’ Closing Submissions (3 September 2015) [165].
See above [113].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
of the Agreement for Lease was one of questioning and discussion.
153
On 9 April 2010, Allens Arthur Robinson, solicitors for Woolworths, responded to
the 6 April 2010 letter from Fetter Gdanski. Omitting formal parts, this letter is as
follows:386
Agreement for Lease: North East Solution Pty Ltd, Shellbelt
Pty Ltd and Woolworths Limited
Property: 195 McIvor Road, Strathdale, Victoria
Thank you for your letter of 6 April 2010 and earlier today. I am instructed to
respond as follows (adopting your original numbering):
1.
Noted.
2.
The amount that your client requires my client to contribute towards
the Landlord’s Works Costs is not acceptable. I understand that my
client intends to arrange a further meeting with Vaughan
Constructions Pty Ltd and its Quantity Surveyor to discuss the
Landlord’s Works Costs and the amount that my client will be
required to contribute.
3.
The payment terms proposed by your client are not acceptable. If our
client agrees to contribute to the Landlord’s Works Costs, then that
contribution will be made on the following terms:
4.
(a)
95% payable within 10 business
Commencement Date of the Lease; and
Days
after
(b)
5% payable within 10 Business Days after the later of:
the
(i)
expiration of the 52 week defect liability period
referred to in cl 5.2(b) of the Agreement for Lease; and
(ii)
the date of rectification of all deficiencies or defects in
the Landlord’s Works notified in writing by the Tenant
to the Landlord under cl 5.2 of the Agreement for
Lease.
Noted. My client also reserves its right to terminate the Agreement
for Lease pursuant to cl 2.2(c).
Unless otherwise defined, terms defined in the Agreement for Lease have the
same meaning when used in this letter.
As Woolworths observe, the parties’ solicitors did, in both letters, reserve their
clients’ respective rights to terminate the Agreement for Lease should agreement not
386
SC:KS
Court Book 3381.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
be reached by 20 April 2010 in accordance with cl 2.2(c). Clearly, as these letters
indicate, the manner in which the Landlord’s Works Costs was to be paid remained
a matter for discussion between the parties.
154
As observed by NES, the letter from Allens Arthur Robinson is instructive on a
number of levels:
(a)
First, it was sent at a time when the open book costing review had been
completed by Rider Hunt, who had provided Woolworths with an estimate
that exceeded that which had been sought by NES. Woolworths had been
briefed by Rider Hunt and had been provided with documents in support of
Rider Hunt’s estimate.387 As such, Woolworths was well able to identify any
issue it may have had with the Vaughan Constructions quote precisely.
Instead, Allens Arthur Robinson merely repeated that the contribution amount
was unacceptable without providing any explanation or reason and cited only
an intention to hold another meeting with Vaughan Constructions and Rider
Hunt without NES being present. NES’s submission in this respect is that
there was no genuine dispute regarding the contribution amount that had
been sought by NES—which amount was less than the Rider Hunt estimate—
and that Woolworths’ real concern was that the contribution amount, however
calculated, materially exceed their approved but undisclosed budget.
(b)
Secondly, the letter was sent at a time when Woolworths had long since
agreed that they would meet any difference between the cost to construct a
Masters store and the cost to construct to a store to Bunnings specifications.388
It was well established that the purpose of the open book cost review was only
to verify the calculation of the amount of that contribution.389 It was also sent
at a time when Woolworths well knew that the cost to construct a store to a
Masters specification significantly exceeded the cost to construct a store to
Bunnings specifications and therefore the amount of the Landlord’s Works
387
388
389
SC:KS
Court Book 3160, 5496.
Court Book 1039.
Court Book 1039.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Costs would be significant.390 Despite this, the Allens Arthur Robinson letter
proceeded on the assumption that the payment of any contribution remained
open for negotiation.
(c)
Thirdly, the form of the contribution that was to be made by Woolworths, that
is, a “lump-sum” payment toward the construction costs, had been long since
agreed—including in the Letter of Offer.391 Woolworths’ attempt to vary this
payment term for the first time, so as to enable the contribution to be made in
stages, up to more than one year after the completion of the development, was
inconsistent with what had been agreed. It may be inferred, in light of the
Property Committee’s decision to pursue an alternative site, that this
requirement was an attempt by Woolworths to bring about a difference
between the parties that it could rely on as a basis for termination of the
Agreement for Lease.
155
A further meeting took place between Rider Hunt and Vaughan Constructions on
12 April 2010 in which, among other things, Mr McDonald requested a detailed
breakdown of the items removed to the value of $831,252 and of Vaughan
Constructions’ fit-out work costs, and a site survey to permit Rider Hunt to check the
calculations.392 In their submissions with respect to this meeting, Woolworths note
that Rider Hunt had previously identified what they regarded as $455,000 in fit-out
costs that ought not to have been included in the Vaughan Constructions estimate
and say that it is reasonable to infer that this was discussed at that meeting. As
indicated previously, the significance or otherwise of this $455,000 figure is in
controversy between the parties, but in the context of the ongoing communications
and discussions between the parties for the purposes of the cl 2.2 process, it is
reasonable to expect that this matter was probably discussed. In any event, the first
two items requested by Mr McDonald were provided on 14 April 2010, together with
a detailed breakdown of all site specific costs and fit-out costs that Vaughan
Constructions had included in its quotation.393 As to other matters, the site survey
390
391
392
393
SC:KS
Transcript 1124.
Court Book 1041.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [27]; Court Book 3384.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28]; Court Book 3385–6.
103
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
was not provided and, in reviewing the further documents, Mr McDonald noted that
in addition to the $455,000 in fit-out costs previously identified, Vaughan
Constructions appeared to have included a further $123,497 in fit-out costs.394
Additionally, Mr McDonald noted the presence of earthworks and retaining wall
costs of $358,806 and $364,469 respectively.395 A further meeting was held on 15
April 2010.396
156
The detailed bill of costs provided by Vaughan Constructions did not include the
$455,000 of fit-out costs that had been included in the generic “extra over” list which
Vaughan Constructions had provided as part of the generic cost comparison process.
This was to be expected as the quotation for the Bendigo store was not supposed to
include items to be paid for by the landlord, NES, whereas the generic cost
comparison was intended to identify all items to be included in a Masters store
regardless of who paid these (the costs were merely separately identified if they
were to be paid by other areas within Woolworths).
The detailed bill of costs
provided by Vaughan Constructions did include site specific costs for earthworks to
level the site and a retaining wall to support the site perimeter as well as $123,497 for
certain fit-out works.397 Although, by that stage, the site specific costs had already
been removed from Vaughan Constructions’ revised quotation.398 On 15 April 2010,
Vaughan Constructions confirmed that its revised assessment of the Landlord’s
Works Costs had been amended to remove the site specific costs.399
157
The 15 April 2010 meeting was the last meeting before the 22 April 2010 meeting and
thus represented something in the nature of the final step in the process thus far,
before what proved to be the critical meeting on 22 April 2010. As to the process
thus far, Woolworths submit:400
While progress had been made by this stage to identify the basis for Vaughan
394
395
396
397
398
399
400
SC:KS
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28(a)].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28(b)]–[28(c)].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [29].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28(a)].
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [25]; Court Book 3367.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [29]; Court Book 3393.
Defendants’ Closing Submissions (3 September 2015) [171]–[173] (emphasis and citations omitted).
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Constructions’ Landlord’s Works Costs figure, to identify items that should
not have formed part of the Landlord’s Works Costs, and towards identifying
the difference in cost between a Masters store and a Bunnings store, Mr
McDonald did not consider that the process had run its course.401 Further, as
noted above, notwithstanding the information provided by Vaughan
Constructions aimed at identifying the cost basis for specific items in which
the Masters and Bunnings briefs differed, Vaughan Constructions had still
not, at this time, provided their complete open book costing for the
Landlord’s Works Costs.
The disconnect between the obvious fact that the process had not completed
(observable from the contemporaneous documents), and Mr Blake’s demands
at the time and subsequent complaints in this litigation, remains unexplained.
Of course, the representatives of Vaughan Constructions could have shed
light on this disconnect by giving evidence at the trial, but Mr Blake tellingly
chose not to call them.
In any event, notwithstanding that the process between Rider Hunt and
Vaughan Constructions had yet to finish and, therefore, the parties did not
know the quantum of the difference as to the Landlord’s Works Costs or
tenant’s contribution, they agreed to meet to “resolve” their differences. The
fact Woolworths did so, and indeed were the one pressing for such a meeting,
itself demonstrates that Woolworths were plainly eager to proceed with the
Strathdale site. Mr Macmillan said that the purpose of the meeting that then
followed was to “talk about the latest letter which I think was the 6th or 9th of
April and talk about the LWC”.402
These submissions are consistent with the initial thesis advanced by Woolworths
with respect to the requirements of the process under cl 2.2 of the Agreement for
Lease for which they contend. As indicated previously, that is not a contention
which I accept, and neither do I accept that it can be said that the parties had not
undertaken the process for the purposes of cl 2.2 thus far in the absence of informed
discussions between experts. Consequently, it is simply disingenuous to suggest
that by 15 April 2010, Vaughan Constructions and, by inference, NES had not
participated fully in an open book costing process for the purpose of calculating the
Landlord’s Works Costs. The issue of whether NES should or should not have
subpoenaed Vaughan Constructions to give evidence, and whether any adverse
inference should be drawn as a result of Vaughan Constructions not being called, is
not a matter which is relevant to the outcome of these proceedings, as is indicated in
these reasons.403
401
402
403
SC:KS
Moreover, as indicated at the outset, the contemporaneous
Transcript 1326–8.
Transcript 589.
Cf Defendants’ Closing Submissions (3 September 2015) [218]–[219].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
documentation—which is quite extensive—provides a comprehensive and reliable
picture in any event.
The 22 April 2010 meeting
158
The provisions of cl 2.2 of the Agreement for Lease provided for a right of
termination in either party in the event that agreement could not be reached on the
Landlord’s Works Costs or the amount that the tenant must contribute towards the
Landlord’s Works Costs, if anything, and the terms and conditions on which this
contribution will be made by the later of 20 April 2010 and the date six weeks after
the date of receipt by the tenant of notice of the Landlord’s Works Costs, or such
later date to which the parties agree. In the context of these provisions, it is to be
observed that the first issue raised by Woolworths with respect to this meeting is its
scheduling. Thus, it is submitted:404
Importantly, it was Mr Macmillan, not Mr Blake, who tried to arrange for the
meeting to take place before 20 April 2010,405 but this was seemingly not
possible for Mr Blake who was apparently unavailable because of the
appointment of a new “General Manager”,406 and so the parties agreed to
meet on 22 April. The lack of urgency on Mr Blake’s part in trying to organise
a meeting before 20 April is striking and contextually very important. As the
time for negotiations was due to expire on the 20 April 2010, it was open to
either party to have terminated the contract on 20 April without agreeing to
meet later. Mr Blake was not able to explain why the defendants would agree
to that, if it was their intention to terminate the Agreement for Lease.407 The
defendants could have done so from 20 April, but did not do so.
20 April 2010 fell on a Tuesday and 22 April 2010 on a Thursday. The reason given
for the delay of two business days on Mr Blake’s part was that he had then very
recently engaged a new General Manager for his group of companies.408 In my view,
this was not an unreasonable request for Mr Blake to make, and if two business days
was a matter of concern to Woolworths, that could have been made very clear to
Mr Blake at the time. It might be said that termination of the Agreement for Lease
was in the parties’ minds having regard to the reservation in this respect in the then
404
405
406
407
408
SC:KS
Defendants’ Closing Submissions (3 September 2015) [174].
As this was the termination date under the Agreement for Lease.
Court Book 3394.
Transcript 301.
Court Book 3396. See also Transcript 300–1.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
recent letters from Fetter Gdanski and Allens Arthur Robinson, but in the context of
communications and discussions between the parties and the experts, I am of the
view that the formal reservation of rights is of no significance in relation to the
timing of this meeting. Additionally, one might have then assumed that all parties
were seriously seeking to agree a position on Landlord’s Works Costs and the
contribution, if any, to those costs by the tenant. Consequently, the inference sought
to be drawn in the Woolworths submissions set out above, to the extent that it seeks
to promote the view that NES was cavalier or not serious in its negotiations, is not, in
my view, justified.
159
Shortly before the 22 April 2010 meeting, Rider Hunt provided Mr Macmillan, at his
request, with a further report in relation to the Landlord’s Works Costs.
Mr McDonald had requested a summary of Rider Hunt’s review of the Landlord’s
Works Costs and where Rider Hunt had reached with Vaughan Constructions as at
that date. Mr McDonald’s evidence is that he was still carrying out his assessment at
that time, and he said that he would try to get it to Mr Macmillan prior to the
meeting that was arranged for 22 April 2010.409 Mr Macmillan’s evidence is that he
received Mr McDonald’s assessment by email only shortly before the meeting was to
commence and was not able to read the memorandum that was attached to the
email.410 Mr Macmillan says that he recalls speaking with Mr McDonald by phone
and understood that it was Mr McDonald’s view that the Masters contribution to the
Landlord’s Works Costs should be no more than around $1.5 million.411
Mr Macmillan also said that he did not consider the process being followed by Rider
Hunt and Vaughan Constructions to be complete, and that his understanding was
that they were still working through the differences between the two design briefs.412
With respect to this report, NES submits that the contribution amount specified of
$1,513,413 would have been within Woolworths’ approved budget; although it
included more than $340,000 in variations, and adjustments of nearly $900,000, many
409
410
411
412
SC:KS
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [102]; Transcript 590, 844.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [103]; Transcript 845.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [105].
Transcript 907–8, 975.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
of which, on closer inspection, are, it says, unsustainable.413
160
Present at the meeting were Mr Macmillan, Mr Graves of Allens Arthur Robinson,
solicitors for Woolworths, Mr Blake, and Mr Davis and Mr Fetter of Fetter Gdanski,
solicitors for NES. Each gave evidence of their recollections of that meeting. Their
recollections varied, which is not surprising, having regard to the meeting having
been held over five and a half years ago. In view of the importance of this meeting,
it is apposite at this stage to reiterate the warning of Lewison J with respect to
witness recollections, reaffirming the position that the most reliable evidentiary
record is likely to be contemporaneous documents. 414
Woolworths provide a
detailed summary with respect to the evidence of the discussions at that meeting, a
summary which it is helpful to set out in full:415
Mr Blake
413
414
415
416
417
418
419
420
421
422
SC:KS
(a)
Mr Blake’s evidence as to this meeting had certain hallmarks of being
reconstructed to fit or present NES’s case, rather than a neutral
account of what he recalled. For example, Mr Blake held to the
position that the only response he got from either Mr Graves or Mr
Macmillan at the meeting about the amount of the Landlord’s Works
Costs was that they were too high.416 He denied there was any
discussion about whether the Vaughan Constructions Landlord’s
Works Costs figure was correctly based on a benched and level site,
and said he could not recall any discussion about whether the
Vaughan Constructions price assumed (as it should) that the site was
connected to services or whether it included full height pre-cast
panels.417 As the file notes of Mr Graves and Mr Davis418 and the
evidence of Mr Graves make clear, these matters were discussed and
more was said about the contribution amount than it was simply “too
high”.
(b)
Mr Blake also said that the defendants’ position on the manner of
payment was “not negotiable”, and denied there was any discussion
regarding alternative ways in which the contribution could be paid.419
Again, the evidence of Mr Graves and Mr Macmillan (discussed
below), and the file notes of Mr Fetter,420 Mr Graves421 and Mr Davis422
Court Book 4745. See also Transcript 428–9, 735.
Foodco Uk LLP v Henry Boot Developments Ltd [2010] EWHC 358 (Ch), [3]–[5]. See above [11]–[12].
Defendants’ Closing Submissions (3 September 2015) [176] (emphasis omitted).
Transcript 155.
Transcript 291–2.
Court Book 3416.
Transcript 292–5.
Court Book 3407–10.
Court Book 3910–4004.
Court Book 3418.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
make it clear that these matters were discussed. Even though Mr
Blake said he did not recall some of the matters put to him, his
response that “I would be happy to deny it”423 was telling. When Mr
Davis’ notes were put to Mr Blake that recorded the discussion
regarding progress payments, he then accepted that something like
that was discussed.424 Similarly, as also discussed below, Mr Davis
and Mr Graves recalled discussion regarding the possibility of NES
becoming insolvent in the context of the discussion as to the manner
of payment, while Mr Blake denied such discussion took place.425
(c)
Mr Blake gave evidence during trial that it was his position that the
contribution had to be made during the construction period,426 but
that he would have been “happy to agree” to progress payments,427
and was prepared to negotiate this position at the 22 April meeting.428
By contrast, as discussed below, the evidence of Mr Graves is that Mr
Blake sought the entire contribution “up front” and described this as
“non-negotiable”.
(d)
Ultimately, Mr Blake accepted that Woolworths’ position in respect of
the manner of payment was perfectly reasonable,429 and voiced no
complaint about the discussion at the meeting in respect of that
matter.430
(e)
Mr Blake did accept, however, that when the discussion on the
Landlord’s Works Costs appeared, to him, to be getting nowhere, he
offered the defendants the right to purchase the options for the site.431
He said that the response was that the defendants would require a
couple of weeks to consider the offer and would come back to him on
4 May 2010.432
(f)
Mr Blake also accepted that at the 22 April 2010 meeting he said that
either party could terminate the Agreement for Lease that day.433
(g)
Finally, Mr Blake accepted that after the meeting on 22 April 2010,
nothing went any further with the Agreement for Lease—“The deal
was done, it was cancelled, it was all over”.434
Mr Davis
(h)
423
424
425
426
427
428
429
430
431
432
433
434
SC:KS
The evidence given by Mr Davis at the trial closely followed his file
notes of the meeting. As such, Mr Davis’ evidence at trial was
somewhat different from that set out in his outline of evidence (which
like other of the NES outlines appeared to have been prepared to
Transcript 294.
Transcript 297.
Transcript 293–4.
Transcript 294.
Transcript 297.
Transcript 287.
Transcript 298–9.
Transcript 299–300.
Transcript 156.
Transcript 156.
Transcript 293.
Transcript 303.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
present NES’s case as set out in the then pleadings, rather than outline
the evidence of the witness in a neutral fashion).
(i)
It was apparent, however, that Mr Davis in fact had little actual
recollection of the meeting. In reality, his evidence was based almost
entirely on his present interpretation of what was contained in his
notes.435 However, he said that:
(i)
he had a “fairly clear memory of him [Mr Macmillan] saying,
‘What we had in mind was $1 million’”;436
(ii)
he recalled Mr Blake going through the manner in which the
Vaughan Constructions quote could be reduced “and that was
discussed to some extent”;437
(iii)
he recalled quite a bit of discussion about options for the
manner of payment and discussion regarding the timing of
any payments;438 and
(iv)
in this context, he recalled concerns about the possible
insolvency of NES being raised.439
(j)
Mr Davis also made an important concession when asked if he
recalled Mr Blake saying to him prior to the meeting that one
possibility was that he might sell the site to Bunnings. Mr Davis
responded: “No I can't recall that. My understanding was he was
expecting—hoping at least—that it would end up being bought by
Woolworths”.440 While Mr Davis then immediately tried to correct
that answer by suggesting that “that was in the meeting”, it is
submitted that his initial answer was the correct one.
(k)
It was also confirmed by Mr Davis that no negotiations regarding the
outstanding matters under the Agreement for Lease occurred after
22 April 2010, and no follow up was made by NES in respect of those
matters.441 While Mr Davis suggested that was because “the ball was
in [the defendants’] court”, if NES had still been interested in
pursuing the Agreement for Lease, it is submitted that it is
inconceivable that either Fetter Gdanski or Mr Blake himself would
not have pressed the defendants for a response. Mr Blake had
certainly demonstrated his previous preparedness in this regard.442
Mr Fetter
(l)
435
436
437
438
439
440
441
442
443
SC:KS
It is submitted that the Court will derive little assistance from Mr
Fetter’s file notes.443 The handwritten note is vague and incomplete,
See, eg, the question of who made the suggestion that matters might come off the Bunnings
specification: Transcript 463–4.
Transcript 478. Cf Court Book 3416.
Transcript 479.
Transcript 479–81.
Transcript 480.
Transcript 484.
Transcript 489.
As evidenced by the requests for updates as to progress given emphasis by NES, discussed above.
Court Book 3407.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
and the typed notes are plainly not contemporaneous.444 The
defendants objected to the production of the typed notes445 and
maintain that objection.446
(m)
When asked about matters recorded in his handwritten file note, Mr
Fetter’s consistent reply was that he could not recall what was
discussed about those matters, other than recalling that there was
discussion about the manner of payment of any contribution447 and
Mr Blake saying “why don’t you buy the site”, to which the response
was that the defendants would need a number of days to consider
it.448
(n)
Mr Fetter could not recall there being any negotiations in respect of
the Landlord’s Works Costs following the meeting.449
Mr Macmillan
444
445
446
447
448
449
450
451
452
453
454
SC:KS
(o)
It was put to Mr Macmillan that he could have adjourned the meeting
to allow himself an opportunity to consider the memorandum from
Mr McDonald. Mr Macmillan said he did not, as there were a number
of other items to be progressed at the meeting.450 Mr Macmillan said,
however, that given how the meeting progressed it never became
necessary to report on where things were at between Rider Hunt and
Vaughan Constructions or to consider such an adjournment as,
effectively, Mr Blake forestalled a need for discussion on the amount
of the Landlord’s Works Costs by saying that he “needed”
$2.94 million451—“Brendan advised that to proceed he needed
$2.94 million”.452
(p)
Mr Macmillan said that Mr Blake stated at the meeting that it was
NES’s final position that Masters should contribute $2.94 million453
and that it was “not negotiable”.454 Mr Macmillan said he was not
Transcript 323.
Transcript 326.
The Defendants objected to the production of the typed notes on several grounds. First, the notes are
not contemporaneous notes of the meeting and were prepared only in the year prior to Mr Fetter
giving evidence on 20 May 2015: Transcript 323. The lapse of time has the effect that any weight that
could be given to Mr Fetter’s notes is significantly reduced. Second, the notes were not prepared by
Mr Fetter himself, but were prepared by NES’s former counsel, Dr Hanak, in an interview with Mr
Fetter some time before trial: Transcript 323. Finally, and most importantly, it is clear that these notes
are not mere transcriptions of Mr Fetter’s file notes, but contain opinions and inferences from the
meeting, as well as statements that address the evidence given by the Defendants’ witnesses. One
example of this includes the statement' “I therefore refute the statement that it was obvious therefore
that a counter offer based on the amount determined by [Rider Hunt] and the payment terms
outlined in the letter of 9 April 2010 would not be agreed and no agreement could or would be
reached”: Court Book 3409. The Defendants submit that it is inappropriate to rely on such notes as an
objective account of what took place at the 22 April 2010 meeting.
Transcript 328–9.
Transcript 330.
Transcript 332.
Transcript 846, 850, 887–8.
Transcript 845–8.
Transcript 885, 887.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [107(a)].
Transcript 848.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
given an opportunity to negotiate that issue,455 and that the discussion
shortly moved on.456 That is, before there was the opportunity to
return to the amount of the tenant's contribution, Mr Blake made his
offer to sell the options for the site to Woolworths.457 As Mr
Macmillan said, the discussion “moved fairly and squarely on [to]
‘Let’s have a look at selling the site’”.458
455
456
457
458
459
460
461
462
463
464
465
SC:KS
(q)
Mr Macmillan recalled discussing the manner that any payment might
be made, including Woolworths’ usual practice of only making such a
contribution at the commencement of the lease given concerns that the
builder may go broke.459
(r)
Mr Macmillan accepted that he said the tenant's contribution sought
by NES was “too high” but said that he did so because Mr Blake had
said that the amount NES wanted ($2.94 million) was “not
negotiable”.460
(s)
While Mr Macmillan accepted that Mr Blake spoke about items that
could be taken out of the Masters specification to reduce the cost to
Masters,461 this is plainly different from being willing to negotiate the
amounts under the Landlord’s Works Costs.
(t)
Mr Macmillan accepted that it would have been reasonable to mention
the $1.5 million figure given to him by Mr McDonald,462 and that it
would also have been reasonable to identify the differences as to the
Landlord’s Works Costs and the tenant’s contribution, why
Woolworths considered the Landlord’s Works Costs estimate to be too
high, and what Woolworths’ expectations were.463 As Mr Macmillan
explained in re-examination, however, it would have been reasonable
to do those things once Woolworths had gone through all of the
information with Rider Hunt and the discussions with Vaughan
Constructions were complete.464 That is, crucially, when Masters had
received NES’s open book costing and had properly identified the
differences to be resolved.
(u)
Mr Macmillan rejected the suggestions that he did not table at the
meeting, or put to Mr Blake, that Rider Hunt had assessed the tenant’s
contribution to be $1.5 million because it would have exposed
Woolworths to the risk of Mr Blake accepting that sum or seeking to
have further negotiations.465
(v)
Mr Macmillan also rejected the suggestion that he referred to a
“maximum” contribution of $1 million at that meeting in order to kill
Transcript 848.
Transcript 849, 851.
Transcript 852.
Transcript 852.
Transcript 591.
Transcript 848–9.
Transcript 888.
Transcript 854.
Transcript 959.
Transcript 1008–9.
Transcript 850.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the negotiation.466 He said he could have said that figure to start a
negotiation.467 It is noted that, despite Mr Blake now saying that he
would have been prepared to reduce his offer by $615,000,468 there is
no evidence from anyone attending this meeting that Mr Blake made
any attempt to negotiate somewhere between his figure of $2.9 million
and Mr Macmillan’s “expectation” of $1 million.469 Indeed, the
reference to the $1 million figure only became apparent to the
Defendants when NES finally produced the file note of Mr Davis,
which should have been discovered as part of the normal discovery
processes.
(w)
Mr Macmillan was questioned at some length about the comment
recorded in Mr Davis’ file note that: “They could deduct 500k from
Bunnings spec”.470 While Mr Macmillan accepted he could have said
that (although he could not recall doing so), it makes no sense for him
to have suggested that Woolworths would have deducted anything
from the Bunnings spec as to do so would increase the tenant’s
contribution. Mr Macmillan confirmed in re-examination that he did
not recall what he suggested the $500,000 might have been deducted
from.471
(x)
Finally, Mr Macmillan said that when he left the meeting on 22 April
2010, as far as he was concerned the Agreement for Lease was dead.472
Mr Graves
(y)
Mr Graves’ account of what he recalled from the meeting was,
perhaps, the most detailed and clearest, and covered:
(i)
466
467
468
469
470
471
472
SC:KS
his recollection of meeting with Mr Macmillan prior to the
meeting at Fetter Gdanski. While this differed from Mr
Macmillan’s recollection in some minor and unsurprising
details (given the events occurred over five years ago), their
evidence was consistent as to the relevant matters—namely,
that Mr Macmillan did not receive the email from Mr
McDonald until shortly before entering the meeting at Fetter
Gdanski, did not have an opportunity to review the
attachment to Mr McDonald’s email, but that he understood
that Mr McDonald said that the difference should be about
Transcript 855.
Transcript 855. Mr Blake gave examples in his oral testimony of the same negotiating strategy,
including in relation to the negotiations as to the rental amount for the Strathdale site: Transcript 169.
Outline of Brendan Edward Blake (6 March 2015) [232].
The Defendants again note that NES ought to be fixed with Vaughan Constructions’ knowledge
obtained through the process with Rider Hunt. This includes that Woolworths had advice from Rider
Hunt that the difference in cost between a generic Masters store of 13,465 square metres and an
equivalent Bunnings store ought to be $1.176 million. Even apart, therefore, from the evidence that
Mr Macmillan said at the meeting that Woolworths’ expectation was that the difference should be
approximately $1 million, [the Defendants submit that] the Court should find that NES already knew
this, or are otherwise deemed to have known it.
Court Book 3411–7; Transcript 857–9.
Transcript 985.
Transcript 928, 954.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
$1.5 million;473
(z)
(ii)
that Mr Blake never offered an alternative figure for the
tenant’s contribution, sticking with the figure of $2.9 million
set out in their 6 April 2010 letter;474
(iii)
that the discussion covered matters of detail regarding the
Landlord’s Works Costs and the amount of the tenant’s
contribution, with Mr Macmillan raising a number of queries
regarding what had been included in the Vaughan
Constructions estimate of the former and the estimate of the
cost of the Bunnings brief used to calculate the latter, to which
Mr Blake responded.475 Mr Graves recalled the discussion
being line by line for some items,476 but not in a way that could
lead to a specific number as Mr Macmillan didn’t have the
information necessary to do so.477 Mr Graves said these
matters were raised by Mr Macmillan as an example of why
Masters had concerns that the Vaughan Constructions costs
were not correct, therefore raising the possibility that there
were other errors;478
(iv)
that there was considerable discussion regarding the manner
of payment of any tenant's contribution, which included
concerns raised about the solvency of NES;479
(v)
Mr Blake suggesting that Woolworths lean on Vaughan
Constructions to get it a lower price or help him find another
builder;480
(vi)
Mr Blake then offering to sell the site to Woolworths, which
involved considerable discussion about the options contracts
(through Mr Fetter);481 and
(vii)
the parties agreeing to extend the expiration date in the
agreement to 4 May 2010.482
With reference to Mr Davis’ file note, Mr Graves recalled:483
(i)
473
474
475
476
477
478
479
480
481
482
483
484
SC:KS
Mr Macmillan saying that his expectations were around
$1 million;484
Transcript 1045–7.
Transcript 1031–2, 1054.
Transcript 1026–8. See also Transcript 1053–4.
Transcript 1033.
Transcript 1055.
Transcript 1057–60. It should also be noted that there was, quite possibly, some confusion as to what
was being discussed at this time: see Transcript 1065–9; Court Book 3416.
Transcript 1025–6, 1028–9.
Transcript 1030.
Transcript 1030–1.
Transcript 1035.
Court Book 3411.
Transcript 1036–7.
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161
(ii)
that the note: “They could deduct 500k from Bunnings spec”485
was not an accurate reflection of the conversation on the topic
of the Troons quote;486
(iii)
that both parties spoke about termination;487 and
(iv)
that Mr Blake said: “Do we walk away today”, to which Mr
Graves responded that they should keep the agreement alive
for another 7 days.488
In my view, the critical points or issues arising from this evidence, somewhat diverse
at times as it is, is provided by the following submissions of NES:489
While the accounts of those present differ as to what happened at that
meeting, it is common ground that:
485
486
487
488
489
490
491
492
493
494
495
SC:KS
(a)
NES stated the position that was contained in its letter of 6 April
2010.490
(b)
Mr Graves and Mr Macmillan restated Woolworths’ position that the
Landlord’s Works Costs contribution sought by NES was too high
having regard to the Rider Hunt calculations.491 Those calculations
were not disclosed.492
(c)
Mr Graves and Mr Macmillan said that any contribution that was to
be paid by Masters would not be paid in a lump sum and would be
paid after commencement of the lease and a defects rectification
period.493 Mr Blake said that NES was looking for a lump sum
contribution in accordance with the Letter of Offer to be paid before
construction, but would be open to negotiate some other
arrangement.494
(d)
Woolworths did not provide or make available the reports it had
obtained from Rider Hunt or any other information that would have
reasonably enabled the parties to identify, with any precision, or to
resolve, the differences that Woolworths had in relation to the NES
estimate.495 The parties were therefore unable to, and did not, resolve
any of their differences in relation to the Landlord's Works Costs or
agree on a contribution figure.
(e)
Mr Blake, on behalf of NES, offered to sell the options to purchase the
Bendigo site to Woolworths, and Mr Graves and Mr Macmillan said
Court Book 3417; Transcript 857–9.
Transcript 1037.
Transcript 1037–8.
Transcript 1039–40.
Plaintiff’s Closing Submissions (3 September 2015) [127].
Court Book 3343; Transcript 589.
Transcript 91.
Transcript 155, 462.
Transcript 465, 590, 1025.
Transcript 155–6, 287.
Transcript 245, 1056.
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they would take a few weeks to consider that offer.496
In my view, this summary is substantially consistent with the account of Mr Graves
and others to which reference is made and does, in the present context, identify the
critical aspects of and issues arising from this 22 April 2010 meeting.
162
Of particular and critical significance, in my view, particularly having regard to the
provisions of cl 2.2 of the Agreement for Lease, is that Mr Macmillan had failed to
read the Rider Hunt further report in relation to the Landlord’s Works Costs which
was emailed to him shortly before the 22 April 2010 meeting. Having regard to the
preceding communications and discussions between the parties and their works
costs assessors, it would be absolutely critical to read and understand this
assessment prior to discussions at the 22 April 2010 meeting. Not having done so it
was all the more surprising for Mr Macmillan to express the view at that meeting
that his, namely Woolworths’, expectations with respect to the Landlord’s Works
Costs were around $1 million. Mr Blake is criticised for “sticking with the figure of
$2.9 million set out in the 6 April 2010 letter”, but this was a figure that had been
raised in earlier communications, namely a letter of 6 April 2010, in relation to which
there had been further discussions but no resolution prior to the 22 April 2010
meeting. Whichever version of the evidence, or combination of versions, of the
totality of discussions at the 22 April 2010 meeting, it is clear, in my view, that the
parties simply never engaged in relation to the issue of the Landlord’s Works Costs.
At least it may be said with respect to Mr Blake that NES had communicated a
position prior to the meeting, whereas it appears that this was not the case with
Woolworths, having regard to the evidence of Mr Macmillan saying that his
expectations were around $1 million for Landlord’s Works Costs. Indeed, it must be
said that, had this always been the expectation of Woolworths, it would have been
most helpful to the process conducted for the purposes of cl 2.2 of the Agreement for
Lease if this had been made clear at the start of discussions. It is not, in my view,
indicative of a willingness on the part of Woolworths to enter into serious further
discussions with respect to the Landlord’s Works Costs, particularly having regard
496
SC:KS
Transcript 245, 465, 592–3, 2030–1.
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to Mr Macmillan’s failure to read the latest Rider Hunt comparative assessment
provided to him shortly prior to the meeting.
163
Woolworths contend that, contrary to the submissions of NES on this point, any
suggestion that the “non-provision” of the Rider Hunt further report provided on
22 April 2010 at the meeting that day was indicative of absence of good faith on their
part should be rejected.497 Woolworths’ submissions on this point are, having regard
to the context of the process the parties were undertaking for the purposes of cl 2.2 of
the Agreement for Lease, an attempt to rationalise and justify a failure on the part of
Woolworths to provide the further report to NES for discussion and evaluation
without delay. Accordingly, this contention is not accepted. The same applies to the
contentions by Woolworths with respect to the complaint by NES that they failed to
disclose that it had a “budget” of $1.7 million in relation to the Landlord’s Works
Costs.498
164
In contrast to the position which, in my view, follows from the evidence and
submissions of the parties as to what occurred or did not occur at the 22 April 2010
meeting, Woolworths submit that the following findings should be made by the
Court from the various accounts of this meeting:499
It is submitted that the Court can make the following findings from the
various accounts of the meeting of 22 April 2010:
497
498
499
SC:KS
(a)
Mr Macmillan attended the meeting with the understanding that the
process between Rider Hunt and Vaughan Constructions had not yet
concluded. That is, he did not have final advice from Rider Hunt as to
what the difference would be between the tenant's contribution
sought by NES and Rider Hunt’s view of what it should be.
(b)
Nevertheless, immediately prior to entering the meeting Mr
Macmillan received advice from Rider Hunt that the difference should
be no more than around $1.5 million. Mr Macmillan did not have the
opportunity prior to the meeting to review the email and attachment
by which that advice was given.
(c)
At the meeting, Mr Blake said that NES needed $2.9 million as the
tenant’s contribution. This was presented as a non-negotiable figure
and there was no negotiation of this figure, although there was
Defendants’ Closing Submissions (3 September 2015) [240]–[246].
Defendants’ Closing Submissions (3 September 2015) [247]–[251].
Defendants’ Closing Submissions (3 September 2015) [177].
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discussion about ways in which the figure might be reduced by taking
things out of the Masters’ scope.
(d)
There was also discussion about what had or had not been included in
the estimates for an alternative Bunnings store, but that the discussion
on these matters was confused and, possibly, at cross-purposes (at
least in the case of Mr Davis).
(e)
There was considerable discussion regarding the manner in which any
contribution might be paid, with various options being put on the
table.
(f)
There was, however, no agreement as to either the tenant’s
contribution or the manner of payment.
(g)
Mr Blake offered to sell the site to Woolworths and, as a result, further
discussion on the tenant’s contribution or manner in which it should
be paid ceased, and the parties agreed to keep the Agreement for
Lease alive for a period of time in order to consider that offer.
(h)
It was also agreed that if, by 6 May 2010, Woolworths had not decided
to purchase the options, the Agreement for Lease would be at an end
and either party could terminate it.
These submissions do not, however, address the issues to which I have referred,
which, in my view, flow out of the evidence of this meeting. In particular, it is no
answer, in my view, to say that Mr Macmillan did not have the opportunity prior to
the meeting to review the email and attachment containing the further advice from
Rider Hunt. Clearly, the contents of that further advice would have to be anticipated
as being important for the discussions which were to take place at the meeting, and
it is not credible to think that, in a project of this significance, a party seriously
undertaking discussions of that type would not ensure that its representatives had
read, understood and considered further advice of this nature. In the context and
having regard to the evidence in relation to this meeting and the preceding
discussions and communications between the parties, I am of the view that it is more
probable than not that Mr Blake’s reference to NES needing $2.9 million as the
tenant’s contribution was a negotiating position, and a position which may have
appeared more intransigent in light of Mr Macmillan’s announcement at the meeting
that Woolworths were looking at a Landlord’s Works Cost around $1 million.
Having regard to the apparent lack of constructive discussion with respect to
Landlord’s Works Costs, it is, in my view, unsurprising that there was further
SC:KS
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discussion in relation to other possibilities with respect to the site, including whether
Woolworths would be interested in purchasing the options to acquire the freehold
for the Strathdale site. Accordingly, I am of the view that nothing flows from this
issue being raised or discussions taking place in relation to it; certainly, nothing of
the character of estoppel, abandonment or waiver on the part of NES.500
165
In any event, whether the Agreement for Lease was only kept alive to permit the
consideration of the purchase of the Strathdale site, it is significant that there were
no steps taken by either party to resolve the outstanding issues under the Agreement
for Lease or to arrange any further meetings between Vaughan Constructions and
Rider Hunt or, indeed, to arrange any further discussion or meeting regarding those
matters between the parties after that date.
Events after 22 April 2010
166
Following the 22 April 2010 meeting, Mr Macmillan spoke to Mr Champion and told
him that the deal had changed and that they were now looking at buying the site,
rather than leasing it.501 Mr Macmillan’s evidence is that, after returning to his office
at Mulgrave, he looked at the information that he had available to assess whether to
buy the Strathdale site.502 He says, however, that he quickly came to the conclusion
that it was not in the interests of Woolworths to purchase the site.503 He said that the
primary reasons for this decision were that the “numbers did not stack up” as
Mr Blake had paid too much money for the options to purchase the land comprising
the site and that there may well be planning difficulties, notwithstanding the
ministerial process that had been set up.504 Mr Macmillan says that he reached this
decision over the course of 22 and 23 April 2010, but did not immediately move to
terminate the Agreement for Lease as he wanted to consider what the other options
were first so he could report back to the Property Committee.505 There is no doubt
500
501
502
503
504
505
SC:KS
Cf Defendants’ Closing Submissions (3 September 2015) [297]–[300]; Transcript 1485–6.
Transcript 595.
Transcript 595–6.
Transcript 928–9.
Transcript 596.
Transcript 597.
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that there was a suggestion by NES that the Strathdale site be purchased by
Woolworths and that it is made clear in an email dated 22 April 2010 from Mr Davis
of Fetter Gdanski to Mr Graves of Allens Arthur Robinson.506 It is significant, in my
view, in the present context, that Woolworths then proceeded to consider
alternatives to the Strathdale site, not merely other sites, but other options, to
provide a Masters store in Bendigo, rather than engage further with respect to the
Landlord’s Works Costs.
167
The evidence was, as discussed previously, that at the 22 April 2010 meeting,
Mr Macmillan had said that after the $2.94 million contribution amount had been
sought by NES, there had been discussions with Vaughan Constructions. As a result
of those discussions, Mr Macmillan said that Woolworths “now think the
contribution should be under $1 million”.507 It does appear, though, to be clear from
Mr McDonald’s evidence that there had been no such discussions with Vaughan
Constructions after the $2.94 million amount had been formulated, let alone any
discussions that would have resulted in a contribution of less than $1 million to
Landlord’s Works Costs. This figure is nowhere near any amount that had ever been
provided to Woolworths by Rider Hunt, even in the 22 April 2010 email, 508 and the
figure was roughly one third of the estimate that had been provided by Vaughan
Constructions and agreed by Rider Hunt at the conclusion of the open book
process.509 Thus, it is said by NES that it was unreasonable for Woolworths to reject
the Vaughan Constructions estimate without providing any meaningful explanation
for that rejection or identifying points of difference that could be negotiated.
Woolworths’ approach, NES contends, was particularly anomalous in circumstances
where Vaughan Constructions was Woolworths’ preferred construction company
and had successfully tendered for the contracts to build the first six Masters stores in
Victoria in Braybrook, Burnside, Coolaroo, South Morang, Dandenong and
506
507
508
509
SC:KS
Court Book 3400.
Court Book 3407; Transcript 963.
Court Book 4231.
Court Book 3293, 3393, 4744; Transcript 103–7; Outline of Evidence of Ewen Kenneth McDonald (27
February 2015) [29].
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Keysborough.510 Thus, in the circumstances, NES submits that it would have been
reasonable for Woolworths to provide some explanation for its “out of hand”
rejection of the Vaughan Constructions quote as being “too high” or “unacceptable”.
Assuming there was some genuine disagreement regarding the calculations
prepared by Vaughan Constructions, I accept that, as submitted by NES, a
reasonable person, acting in good faith, with a genuine desire to identify and resolve
any differences would surely disclose what those differences were. In this respect,
Mr Macmillan admitted this, but said that Woolworths was “still going through [the
process]” of identifying the differences.511
Plaintiff’s allegations of breach
168
On 6 May 2010, Woolworths terminated the Agreement for Lease by letter of that
date addressed to Mr Blake of NES. The letter critically stated:512
Further to our recent discussions, in accordance with clause 2.3(c) of the
Agreement for Lease … Shellbelt Pty Ltd hereby terminates the Agreement
with immediate effect.
This was in circumstances where no agreement had been reached for the purposes of
those provisions of the Agreement for Lease.
169
In this respect, NES submits that the natural inference to be drawn from the events
leading up to the termination by Woolworths of the Agreement for Lease—including
as set out in Woolworths’ own contemporaneous correspondence, namely the letter
to which reference has just been made—is that the “real” reason for Woolworths’
termination of the Agreement for Lease was not an inability on the part of NES and
Woolworths, acting in good faith and reasonably, to resolve any differences they
may have had in relation to the Landlord’s Works Costs. Rather, NES contends that
the Court should find that the “real” reason or reasons for the decision by
Woolworths to terminate the Agreement for Lease were:
(a)
510
511
512
SC:KS
the inability of Woolworths to bring the Landlord’s Works Costs and the
Court Book 4694–5.
Transcript 959, 963.
Court Book 3442.
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tenant’s contribution to those costs within Woolworths’ approved but
undisclosed budget;
(b)
the perceived lack of support on the part of the Council;
(c)
the perceived financial difficulties of NES; and
(d)
critically, a decision made by the Property Committee to pursue the
strategically important Hume & Iser Home Timber & Hardware store, which
was a key customer of Danks and which both Bunnings and Danks had been
pursuing.
These were not, NES contends, grounds upon which Woolworths was free to
terminate the Agreement for Lease.
170
Moreover, NES contends that Woolworths’ reliance on cl 2.2 of the Agreement for
Lease to terminate was, and is, false as is evident from the handwritten notes of Mr
Champion, the Woolworths executive responsible for the Masters rollout, along with
Mr O’Brien, made on the day before the termination, in which Mr Champion
states:513
Agreement to lease the currently approved site expected to fall over today.
The grounds are that the parties have not reached agreement on cost of building.
Reality is that Council will not support that site. Landlord offered to sell for
$6.3m ~ 500k margin. We have politely declined.
The Hume and Iser site is the large & successful Home Hardware—very interested in
selling to us …
NES submits that there can be no doubt, in its context, that the reference by Mr
Champion to the “Reality” in his notes was intended to, and does, distinguish
between the “real” reason for Woolworths’ termination of the Agreement for
Lease—namely the opposition of the Council and the pursuit of the Hume & Iser
store—and the reason Woolworths now seeks to rely upon. NES further observes
that Mr Champion makes no reference to this note in his Outline of Evidence and
513
SC:KS
Court Book 4046 (Plaintiff’s emphasis).
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that his oral evidence to the effect that this statement had the opposite meaning to its
plain ordinary meaning lacks credibility and should not be accepted.
171
In view of the significance which NES, at least, placed upon this handwritten note of
Mr Champion which has been set out, it is helpful to make reference to Mr
Macmillan’s oral evidence in this respect:514
Yes, the reference to the grounds, the use of those two words “the grounds”,
is a reference to the grounds for the Agreement for Lease referred to in the
previous sentence falling over, nothing to do with the offer made by Mr Blake
which was rejected on 23 April? --- Yes.
Turning to the reality, I suggest to you the reality again relates to the
Agreement for Lease currently approved by the Property Committee, not the
offer made by Mr Blake, rejected on 23 April? --- I don’t know.
Later, and slightly more expansively, Mr Champion answered:515
Can I take you to the second sentence you’ve written here, after saying that:
“The agreement was expected to fall over”, you say: “The grounds are that
the parties have not reached agreement on cost. Reality is that Council would
not support the site.” You are informing the committee, I suggest, that the
stated grounds are that the parties have not reached agreement on the cost of
building but the reality is the site would not go ahead because the Council
wouldn’t support it, that’s right, isn’t it? --- I believe that that is a view—yes,
the agreement was at an end for one reason. As it happened, it would have
been difficult to get through because of the lack of Council support in any
case.
The true reason is the one described as the reality, isn’t it?---No, I don’t
believe that to be the case.
You chose that word?---I didn’t say, “The real reason”, though, for example.
What difference do you see between words “the grounds” on the one hand
and “reality” on the other hand?---The grounds are the legitimate reason in
which the parties ceased the agreement, the reality is the notation that in any
case, the Council was not supportive.
I suggest to you, sir, that is not a believable explanation of your choice of
language?---My view, Mr Bick, is that’s what I intended.
172
Mr Champion’s later oral evidence—as set out in the second quoted passage in the
preceding paragraph—is consistent with Mr Macmillan’s thesis that the Agreement
for Lease was “dead” after the 22 April 2010 meeting and that other options were
514
515
SC:KS
Transcript 958.
Transcript 1206–7.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
being considered, namely the purchase of the site by Woolworths.516 At the time the
note was written, however, the Agreement for Lease had not been terminated, but
the wording of the note itself is not consistent with Mr Macmillan’s thesis that the
Agreement was “dead” following the 22 April 2010 meeting. Rather, its wording is
consistent with the position that the Agreement for Lease was indeed still on foot
and that whilst other options, including the purchase of the freehold on the
Strathdale site by Woolworths was a possibility, agreement between the parties as to
Landlord’s Works Costs had not then been put to one side. Moreover, the wording
of the note is not inconsistent with the position put by NES that Woolworths chose to
terminate the Agreement for Lease for reasons other than the grounds upon which it
was terminable according to its terms.
Accordingly, I am of the view that Mr
Champion’s oral evidence does not detract from the force of this note and that it
should be understood in the manner for which NES contends.
173
This position is, in my view, reinforced when one has further regard to some aspects
of the detail of the dealings between the parties prior to the 22 April 2010 meeting.
174
It was accepted by Mr Macmillan in cross-examination that the function of the open
book review process was to identify the true difference in cost between a Masters
store which would be built at Strathdale and an equivalent Bunnings store.
Moreover, by the end of the line-by-line part of the open book review process, Rider
Hunt estimated the Landlord’s Works Costs at $3,247,195, as set out in an email
dated 31 March 2010 from Mr McDonald, of Rider Hunt, to Mr Macmillan, copied to
Mr Killesteyn, which, omitting formal parts, is as follows:517
Bob,
We have reviewed the submission from Vaughans detailing the cost
difference from the Bunnings store at Coburg and the proposed Project
Oxygen store at Bendigo and note the following issues;
516
517
SC:KS

The Bendigo store is 10,923m2

The Coburg store upon which the comparison is made was built to a
2002 brief. We have not sighted this brief.
See above [160] (quoted para (x)).
Court Book 3297.
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
The Project O amenities, administration, mezzanine is 828 m2
compared with the Coburg store at 354 m2. The majority of the
mezzanine cost difference (item 54) in the attached comparison
exists because of the extra area. We question whether this is correct
methodology as the rent may be struck on the area of the store
which would then include for this extra cost.

The cost difference includes $200k for light fittings. We understand
that this item will now be supplied by Oxygen.

Item 59 is the provisional sum for the floor finish at $30/m2. This
does not reflect our understanding of the cost of the current floor
specification but is in accordance with the information used by
Vaughan.

A cost has been included for plant platform screens, these may not
be required. We don’t have them on Braybrook & Coolaroo but may
be a planning issue for this site.
The section highlighted in yellow on the attached spreadsheet is our view of
the split of the extra cost between base build, site related costs, fitout and
authorities fees.
The total difference is $3,247,195 inclusive of additional Preliminaries &
Supervision, design fees (2.5%) and builders margin (5%). This has not been
finally agreed with Vaughan yet.
This figure was, as NES submits, far greater than the amount which NES had sought
by way of Landlord’s Works Costs.518 By the end of Rider Hunt’s later review of the
Vaughan Constructions estimate—by 15 April 2010—all differences that had been
identified by Rider Hunt,519 such as an adjustment for a benched and levelled site,
had been incorporated by Vaughan Constructions into its revised quotation which,
in substance, is in the following terms:520
Ewen,
As requested below is a consolidation of the original Vaughan Estimate then
deducting the “site specific” items requested by the developer:

Vaughan Original Estimate = $12,348,061(+gst)
Deletions requested by Developer
- Power authority & other authority head works contributions
- Site levelling with a fall greater than 300mm across the site &
excluding demolition
518
519
520
SC:KS
Court Book 3295, 3393.
Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [13].
Court Book 3367 (emphasis in original). See also Court Book 3393.
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-
Town Planning (DA) Costs

Vaughan Adjusted Estimate = $11,516,809(+gst) or $1,051,36/sqm
Therefore, deduction from total cost for specific site related costs is
$831,252(+gst)
Hope this helps and confirming David Smith will be available to meet with
you at our office at 10am on Monday morning.
Please feel free to call me with any other queries.
This revised quotation had been incorporated by NES into its revised contribution
notice, namely the letter dated 6 April 2010 from Fetter Gdanski, solicitors for NES,
to Allens Arthur Robinson, solicitors for Woolworths. At this point, negotiations
had concluded, though, as has been observed previously, further assessment was
taking place by Rider Hunt and further advice provided by that firm to Woolworths
in the email correspondence with Mr Macmillan prior to the 22 April 2010 meeting,
particularly the detailed comparison of costs as between the parties which Rider
Hunt had prepared, but which Mr Macmillan failed to read prior to the 22 April 2010
meeting. In this respect, NES submits that the Court should find that, had Mr
Macmillan been authorised to accept a tenant’s contribution amount of greater than
$1.7 million—or a Landlord’s Works Costs of $11.5 million—then, acting with the
requisite contractual object in mind, Woolworths would have accepted NES’s
revised estimate of $2,941,149. Moreover, Mr Blake’s evidence is that NES would
have accepted this figure in order to progress the development.521
175
In light of the costs assessments by Rider Hunt and Vaughan Constructions, it does
appear, as submitted by NES, that it is a reasonable inference for the Court to draw
that the revised amount sought by NES was not accepted by Woolworths as Mr
Macmillan had no authority to accept it.
176
There is further controversy between the parties as to the preparation of the further
report by Rider Hunt which was supplied to Mr Macmillan, but not read by him,
prior to the 22 April 2010 meeting. In any event, even if NES is correct in this
respect, it is further submitted that the request by Mr Macmillan resulted in the
521
SC:KS
Outline of Brendan Edward Blake (6 March 2015) [232]. Court Book 322.
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22 April 2010 email to Rider Hunt which contained various errors and in no way
reflected the state of discussions between Vaughan Constructions and Rider Hunt as
at that date.522
177
Consequently, I am of the view that the evidence indicates that the open book
process had been completed by 22 April 2010 and, more precisely, I think by 15 April
2010 as the issues identified by Rider Hunt had then been agreed and incorporated
into the revised estimate provided by NES.
178
Thus, in my view, by 15 April 2010, and thus well before the 22 April 2010 meeting,
there was no genuine disagreement between the parties as to the calculation of the
Landlord’s Works Costs. Moreover, Woolworths was not satisfied with the result
because the true contribution amount exceeded its approved but undisclosed budget
and the store cost exceeded its undisclosed “target”,523 but this state of affairs did not
constitute a “difference” as contemplated by the Agreement for Lease.
Woolworths did not act reasonably to identify and resolve any differences
179
NES also invites the Court to find that Woolworths failed to act reasonably to
identify or negotiate the differences in relation to the calculation of the Landlord’s
Works Costs and the contribution to be paid by Masters. For the reasons which
follow, I accept that, at least in general terms, this is the correct view or
characterisation of the conduct of Woolworths. I would, however, take a different
view with respect to some aspects of the conduct of the parties, as indicated in the
reasons which follow.
180
Mr Blake’s evidence was that Woolworths excluded NES from the open book review
process, or at least did not invite NES to participate in it 524 and that Woolworths
failed or refused to provide NES with the reports and documents produced by Rider
Hunt during the open book review, including the Vaughan Constructions
522
523
524
SC:KS
See Court Book 4745.
As a cost per square metre. The target was $12 million for a 13,500 square metre store.
Landlord’s Works Costs was $11,516,809 (Court Book 3393) for a 10,923 square metre store.
Outline of Brendan Edward Blake (6 March 2015) [199].
The
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comparison on 15 March 2010,525 the Rider Hunt estimate of 29 March 2010,526 or 22
April 2010.527 It is also said that Woolworths also failed to communicate in any
meaningful way what, if any, differences it had identified or why it considered the
NES estimate to be “too high” or “unacceptable”. It is to each of these claimed
deficiencies to which I now turn in some detail.
181
Mr Macmillan admitted in cross examination that it would have been a reasonable
course of action to invite NES to attend and participate in the open book meetings.528
Consistently with this position, Mr McDonald’s evidence was that he expected that
any negotiations to take place between Woolworths and NES were to take place
directly.529 Indeed, Mr Macmillan’s position in this respect is emphasised in its
context of a range of admissions by Mr Macmillan with respect to the approach of
Woolworths to the process of establishing the Landlord’s Works Costs. In this
respect, the critical parts of Mr Macmillan’s oral evidence are as follows:530
I’ve already taken you twice to three emails and once to three conversations
in which [Mr Blake] asked for feedback from those meetings, I put it to you
again you never asked him to attend?---No.
It would have been reasonable to ask him to attend, do you agree?---He was
also aware when those meetings were and could have attended as well.
That’s not the question. It would have been reasonable for you to invite him
to attend, do you agree?---A lot of the meetings I didn’t attend either.
HIS HONOUR: Please answer the question?---Sure.
MR BICK: Do you agree it would have been reasonable to invite Mr Blake to
attend those meetings?---Yes.
Do you agree that it would have been reasonable to identify the differences as
to Landlord’s Works Costs and Woolworths’ contribution to Mr Blake?---Yes.
Do you agree that it would have been reasonable to explain to Mr Blake why
you considered or Woolworths considered the Landlord’s Works Costs
estimate to be too high or unacceptable?---We were still going through that
process but yes.
525
526
527
528
529
530
SC:KS
Court Book 3114.
Court Book 3293.
Court Book 4745.
Transcript 959.
Transcript 1342.
Transcript 959–61.
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The answer is yes, is that right?---Yes.
Would it have been reasonable to tell Mr Blake what your expectations were?
---Yes.
Would it have perhaps resulted in Mr Blake having a better understanding of
your position?---As I’ve said, he used Vaughans to get a basis of where things
--I’m not asking you about his relationship with Vaughans. Would it have
been reasonable for Mr Blake to understand your expectations and what they
were based on?---Yes.
Would it have been reasonable for you to discuss your expectations and what
they were based on with him?---And we were still going through that
process, yes.
He wasn’t involved in that process, was he?---No.
Would it have been reasonable for you to discuss any differences you or
Riders may have had with Mr Blake?---Once I had a good understanding of
those, yes.
Sorry, once?---I had a good understanding of what they were, yes.
Would it have been reasonable for you to get a good understanding of those
differences?---At a particular time in the process, yes.
Without understanding those differences, you couldn’t have a meaningful
discussion with Mr Blake about them, could you?---Not in detail, no.
Not at all, I suggest?---There was a number of things we had to talk about.
Those discussions didn’t occur?---In the meeting of 22 April we spoke about
his expectation of the 2.94, that’s the amount and we also spoke about how
that contribution was going to be paid.
If you in fact had a view that $1.176 million was a reasonable expectation, it
would also have been reasonable to provide that estimate to Mr Blake so that
he could understand where you were coming from, do you agree?---Yes.
Do you agree it would have been reasonable for you to give Mr Blake the
Riders reports of 29 March and 22 April?---Well, I assume the 29 March one
he may have already received through Vaughans but the 22 April one, I
wanted to have a review of that first.
There’s no evidence that the 29 March report from Riders was ever
communicated to Vaughans or Mr Blake, Mr Macmillan?---I’m aware of that
now.
Do you accept it would have been reasonable for those two reports to be
provided to Mr Blake?---Over that period of time, yes.
Do you accept it would have been reasonable for you to discuss those reports
with Mr Blake?---The only difficulty with that is the process was still going
and there were still further discussions in that regard.
SC:KS
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Do you accept it would be reasonable once the further discussions had
reached whatever outcome they reached, for you to have those discussions
with Mr Blake then about the two Riders reports?---Yes.
Do you agree it would have been reasonable to extend the time for having
discussions with Mr Blake until what was occurring or what was to occur
after the 15 April meeting had been completed?---Which is the 22 April when
we met.
Sorry?---Yes, is your answer.
182
When it was put to Mr Blake in cross examination “You were able to go along to any
of these meetings, if you wanted to, weren’t you?”, Mr Blake said “I was specifically
prohibited from attending these meetings.”531 As indicated in the passage from the
transcript just quoted, Mr Macmillan’s evidence was that he did not invite Mr Blake
to attend the meetings, which he admitted would have been the reasonable thing to
do.532 He did, however, believe Mr Blake knew where the meetings were and could
have attended.533 It goes without saying, however, that a response of this nature is
not indicative of open and willing engagement in a process requiring ongoing
discussions and communication addressing significant detail for the purpose of
determining the Landlord’s Works Costs. Moreover, it appears to be at odds with
the initial “enthusiasm” and apparent pressing urgency on the part of Woolworths
to roll out the Masters stores as soon as possible, as is evidenced by the approach of
proceeding to arrangements with the likes of NES to negotiate construction of a
Masters store at the Strathdale site without the detailed design brief and costings
that might ordinarily be anticipated. In these circumstances, it might be thought that
Woolworths would be insisting on Mr Blake’s close involvement for the purpose of
resolving matters as quickly as possible. The fact that this was apparently not the
case is really almost as surprising as the proposition that a sophisticated and forceful
businessman like Mr Blake could be excluded from this process if he wished to
attend these meetings.
In any event, as indicated previously, whether or not
Mr Blake was excluded is not decisive in the present circumstances.534 Rather, the
critical circumstance is the extent to which information was disclosed by
531
532
533
534
SC:KS
Transcript 249. See also Transcript 250–2.
Transcript 959.
Transcript 958–9.
See above [128].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Woolworths, particularly its queries and any concerns as to the cost differences
between the expert estimates and any overriding cost budget which Woolworths
had imposed on the proposed development.
183
In the latter respect, NES submits that while Mr Blake was not able to explain why
Woolworths did not want him present at the open book meetings,535 it is open on the
evidence for the Court to find that NES was not invited to participate in the “open
book” process because, had NES been involved, it may have sought Woolworths’
agreement to a contribution amount that had been verified by Rider Hunt, but which
Mr Macmillan was not authorised to agree to because it exceeded Woolworths’
undisclosed budget. Moreover, it is said that this is likely having regard to the
estimate reached by Rider Hunt on 29 March 2010; namely that the total difference
was then estimated at $3,247,195 inclusive of additional Preliminaries & Supervision,
design fees (2.5 per cent) and builder’s margin (5 per cent).536 In the circumstances, it
is contended that it may be inferred that Mr Macmillan sought to exclude NES from
the process until such time as the construction costs could be reduced to a level that
was within Woolworths’ approved but undisclosed budget. In all the circumstances,
and, particularly, having regard to Mr Macmillan’s apparent lack of interest in
ensuring that he had read and considered the Rider Hunt report of 22 April 2010 at
or prior to the 22 April 2010 meeting—or, if necessary, sought to adjourn that
meeting to allow him to read and consider this further report—I am of the view that
this is, indeed, a fair inference and is more likely than not the position.
184
In any event, NES was not invited to participate in the process, did not participate in
it537 and was, if not excluded or not invited to attend the “open book” process, they
were not provided with information about the progress of the review and the
differences to be resolved, in spite of repeated requests for information in this
respect by Mr Blake.538 No informative response was provided to these requests.
535
536
537
538
SC:KS
Transcript 251.
Email dated 29 March 2010 from Mr McDonald of Rider Hunt to Mr Killesteyn of Woolworths and
copied to Mr Macmillan also of Woolworths: Court Book 3293.
See Transcript 1274, 1276, 1314.
Court Book 3094, 3137, 3164, 3170, 3176, 3288, 3370. See also Transcript 289, 306, 316.
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More particularly, in spite of these requests for information arising from the open
book process and despite Woolworths having been provided with detailed
information from Rider Hunt on 29 March 2010 and again on 22 April 2010, these
reports from Rider Hunt were never provided to NES.539 Nor did Mr Macmillan
provide Mr Blake with an update as to the progress of the open book process at the
meeting of 22 April 2010, as he said they simply “didn’t get to that”.540 It is hardly
surprising that the repeated failure by Woolworths to provide NES with details of
any difference in the Landlord’s Works Costs calculation that may have been
identified in the open book process made it impossible for any negotiation to take
place in accordance with cl 2.2(b) of the Agreement for Lease.
185
Rather, throughout March 2010, Mr Blake attempted to discuss the estimate of
Landlord’s Works Costs provided by Vaughan Constructions with Woolworths,
only to be told repeatedly by Mr Macmillan that the estimate was “too high”.541 No
further explanation was provided to NES by Woolworths, no alternative figures
were suggested by Mr Macmillan and no negotiations were entered into by the
parties.542
186
Thus, on 31 March 2010, Woolworths maintained its position that the Vaughan
Constructions estimate was “too high”543 and did not provide NES with the estimate
Rider Hunt had provided to Woolworths and nor did Woolworths articulate any
differences Rider Hunt may have identified in relation to the Vaughan Constructions
estimate.544
187
Having regard to the matters to which reference has been made, it is clear that
Mr Macmillan failed to enter into discussions or to pursue discussions with NES,
particularly with Mr Blake, in relation to the Landlord’s Works Costs, despite being
539
540
541
542
543
544
SC:KS
Court Book 3293, 4745.
Transcript 845–6.
Outline of Brendan Edward Blake (6 March 2015) [207]; Outline of Evidence of Timothy Stuart Macmillan
(27 February 2015) [79]. See also Transcript 581; Court Book 3090, 3074.
Outline of Brendan Edward Blake (6 March 2015) [193]; Court Book 1160. See also Transcript 1044–5.
Outline of Brendan Edward Blake (6 March 2015) [220].
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [91]; Outline of Brendan Edward Blake
(6 March 2015) [219]. See also Transcript 714.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the person charged by Woolworths with negotiating site deals, including details as
to costs and tenants’ contributions.545 Thus, I accept that it is a reasonable inference,
having regard to these matters, that Mr Macmillan was not prepared to negotiate
any differences in relation to the Landlord’s Works Costs at this stage because the
Masters contribution which had been identified by Rider Hunt still far exceeded his
authorised but undisclosed budget. In my view, this inference is reinforced further
when attention is turned to the meeting of 22 April 2010. It is to this that I now turn
in this context.
188
At the meeting of 22 April 2010, Mr Blake restated the position of NES that
$2.94 million was required by the landlord to progress the project.
Again, Mr
Macmillan dismissed this figure as “too high” and the conversation progressed to
how the contribution was to be made.546 No attempt was made, however, to explain
to Mr Blake why the figure was “too high”,547 or which aspects underlying that
estimate were considered to be inaccurate.548
Several individuals attending the
meeting gave evidence that there was no discussion about whether the $2.94 million
figure could be negotiated,549 including the evidence of Mr Macmillan.550 At this
point, excluding variations and adjustments, the Rider Hunt estimate of the
Landlord’s Works Costs, the Masters contribution, still exceeded the approved but
undisclosed budget of Woolworths.551
189
NES submits that insofar as Woolworths had consistently refused to identify any
differences it may have had in relation to the Landlord’s Work Costs, it cannot be
said to have made any genuine attempt to resolve those differences as required by
cl 2.2 of the Agreement for Lease. Despite admitting that it was necessary to identify
any differences that might exist in relation to the Landlord’s Works Costs as part of
545
546
547
548
549
550
551
SC:KS
Transcript 699–700.
Transcript 846–7.
Transcript 848.
Outline of Evidence of Michael David Fetter (6 March 2015) [64]–[65].
Outline of Evidence of Michael David Fetter (6 March 2015) [56], [64]–[65]; Outline of Evidence of Gerald
Peter Davis (6 March 2015) [86]; Outline of Brendan Edward Blake (6 March 2015) [228]. See also
Transcript 155, 326, 483, 848–9, 853, 1070.
Transcript 703.
Court Book 4745.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the obligation under cl 2.2,552 Woolworths did not identify any specific differences
between the Vaughan Constructions and Rider Hunt estimates that were the basis of
the view Mr Macmillan expressed on behalf of Woolworths that the Vaughan
Constructions estimate was “too high”. Moreover, Mr Macmillan admitted that he
failed, at the 22 April 2010 meeting, to disclose to NES what the differences were or
what Woolworths’ position was as “the deal had changed” to looking at the
purchase of land itself.553 The evidence to the effect that the Agreement for Lease
had been discharged or varied at the 22 April 2010 meeting is, I accept, inconsistent
with Woolworths’ pleaded case and the evidence of other persons who attended the
meeting.554 The evidence of Mr Graves to the effect that Mr Macmillan pointed to
examples where he thought the Vaughan Constructions’ costings were incorrect555 is
contradicted by evidence from all other attendees at the meeting,556 including
Mr Macmillan, who admits that they did not go into detail of any of the differences
at that meeting.557 Moreover, the matters that Mr Graves said were identified as
issues with the Vaughan Constructions’ costings were all issues that had been
identified, resolved and incorporated into the revised NES estimate prior to the
22 April 2010 meeting. At best, as contended by NES, these issues may have been
raised as examples of why the Vaughan Constructions costings could not be relied
upon until further work had been completed. I do, however, for the preceding
reasons, reject any suggestion that any extant differences between the parties were
identified or negotiated at the 22 April 2010 meeting.
190
It is in this context that the submissions by Woolworths as to the breaches alleged by
NES with respect to the Landlord’s Works Costs and contribution must be viewed.558
These submissions are, in my view, nothing more than an attempt to justify the
Woolworths position by, in effect, rehearsing arguments and contentions with
respect to the cost of developing the Strathdale site—hence providing a basis for
552
553
554
555
556
557
558
SC:KS
Transcript 907.
Transcript 963–4.
See above [160]–[165] as to the evidence of discussions at the 22 April 2010 meeting.
Transcript 1033–4, 1054–5.
Outline of Evidence of Michael David Fetter (6 March 2015) [61]. See also Transcript 493.
Transcript 700–1, 846. See also Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [107].
Defendants’ Closing Submissions (3 September 2015) [223]–[239].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Landlord’s Works Costs and contribution—arguments and contentions which
should have been disclosed to and discussed with NES at the relevant time.
191
Mr Macmillan gave evidence that, in his view, any differences Woolworths had
identified with respect to costings did not have to be communicated to NES until the
open book process had been completed.559 However, despite being aware that, at
the time of the 22 April 2010 meeting, Mr Blake regarded the open book process as
completed,560 Mr Macmillan did not advise NES that the process was continuing, nor
did he provide NES with information about the progress made or the differences
identified. As any differences that Woolworths may have had were never properly
identified by it or articulated to NES, the parties did not, and could not, have
negotiated to resolve any such differences. It is, of course, so obviously the position
that if parties do not identify differences between them, the prospect of negotiating
those differences to agreement is likely to be dramatically reduced, almost to the
point of impossibility, depending on the particular circumstances. In the present
circumstances, anyone involved in this process would have, from their expertise and
experience, appreciated that impossibility was the likely outcome.
192
Going back to the 22 April 2010 meeting, when Mr Blake suggested that the
Landlord’s Work Costs and Masters’ contribution could be reduced if the
Woolworths specifications were varied, the evidence is that this line of discussion
was not pursued.561 Rather, the conversation moved to the form of the contribution
that was to be made by Woolworths.562
193
Also, going back to the 22 April 2010 Rider Hunt report, to the extent that this report
may have identified differences in relation to the calculation of the Landlord’s Works
Costs or Masters’ contribution, the evidence is as has already been observed, that
Mr Macmillan did not read the report and that Woolworths had not yet confirmed or
559
560
561
562
SC:KS
Transcript 908.
Transcript 718.
Outline of Brendan Edward Blake (6 March 2015) [232]. See also Transcript 888; Outline of Evidence of
Gerald Peter Davis (6 March 2015) [88].
Outline of Brendan Edward Blake (6 March 2015) [233].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
accepted any of the differences identified by Rider Hunt.563
Despite having
discussed the report briefly with Mr McDonald that morning, Mr Macmillan
conceded that he did not have a proper understanding of the estimates and
differences,564 which prevented there from being any meaningful or detailed
discussion with NES regarding those differences.565
Moreover, Mr Macmillan
admits that he made no attempt to negotiate the Landlord’s Works Costs
contribution,566 or to offer a figure that was acceptable or would have been
acceptable to Woolworths567 and that no negotiations were entered into at the
meeting because he regarded the open book process as ongoing.568 I accept that even
if this was the case and that the open book process was ongoing, this would not have
precluded Woolworths from providing NES with the information it had requested.
Indeed, if this was the position held by Woolworths, then it would have been
expected that the differences identified in the 22 April 2010 Rider Hunt report would
have been communicated to NES and attempts made by Woolworths to negotiate
any differences in relation to the Landlord’s Works Costs estimate subsequent to the
22 April 2010 meeting or at any time prior to termination.569
194
For the preceding reasons, I am of the opinion that Woolworths did not act
reasonably to identify and resolve any differences it may have had with the NES
estimate of the Landlord’s Works Costs or the Masters contribution.
Role of Vaughan Constructions
195
Woolworths, in its Defence, denies that it failed to act reasonably and in good faith
in an attempt to resolve differences it had with NES in connection with the
determination by NES of the Landlord’s Works Costs. The particulars provided to
that Defence state that Woolworths acted reasonably and in good faith to resolve the
differences between Masters and NES because “Masters and Riders” communicated
563
564
565
566
567
568
569
SC:KS
Transcript 907–8.
Transcript 907–8.
Transcript 960.
Transcript 853.
Transcript 854.
Transcript 699–700, 907–8, 960–2.
Transcript 155, 462.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
with “representatives from NES and Vaughan Constructions” to communicate,
consider and attempt to resolve these differences.570
The communications in
question were communications between Woolworths, Rider Hunt and Vaughan
Constructions during the “open book” review process.
196
As NES observes in its submissions, there are some obvious difficulties with this
defence. First, Woolworths does not contend that it discharged its obligation to act
reasonably and in good faith by identifying differences in relation to the estimate by
NES of the Landlord’s Works Costs and communicating and attempting to resolve
those differences with NES directly, as the Agreement for Lease contemplates.
Instead, Woolworths contends that the communications and negotiations took place
between “Masters and Riders” on the one hand and “NES and Vaughan
Constructions” on the other hand during the “open book” review process. As has
been indicated in the preceding reasons, the evidence is, however, to the contrary.
197
The evidence is that NES was not invited to, and did not, participate in the “open
book” review process and that there were no material communications between
Woolworths and NES in which Woolworths identified differences in relation to the
NES estimate of the Landlord’s Works Costs or the Masters contribution or sought to
negotiate to resolve any differences between the parties. The only communications
with NES, save at the 22 April 2010 meeting, were to the effect that the estimate was
“too high” and that the open book process was continuing. Moreover, as has been
indicated previously, even the discussions at the 22 April 2010 meeting took matters
little further than the repetition of the Woolworths position that the estimate was
“too high” and in circumstances where the reason for this position continued to
remain opaque.
Consequently, as NES did not participate in the “open book”
process and had no material discussions with Woolworths regarding issues with the
Landlord’s Works Costs estimate, Woolworths’ defence must rest on the contention
that Vaughan Constructions participated in the “open book” process as an agent for
NES. NES, in its submissions, says that this contention is unpleaded. Nevertheless,
570
SC:KS
See Amended Defence (28 November 2013) [15].
137
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the issue was addressed at trial in circumstances where it now does need to be
addressed.
It should also be observed that the contention that Vaughan
Constructions had the authority, as agent, to communicate, consider or conduct
negotiations on behalf of NES was not put directly to Mr Blake in cross-examination.
In any event, I accept for the reasons which follow that the evidence does not
support such a finding.
198
It is well settled that it is not sufficient to establish an agency relationship that one
person did work at the request of another person for that person’s benefit.571 On the
contrary, it is necessary to look to the substance of the relationship, including the
agreement and precise circumstances of the relationship between the parties, to
determine whether or not an agency relationship exists.572 It is central to the notion
of agency that there be the consent of the principal for the agent to act on his or her
or its behalf573 and the conferral of authority by the principal on the agent, including
the principal’s ability to control his or her agent.574 Thus, every agency relationship
necessarily involves the agent having “actual or apparent authority to act, or in fact
acting, as representative of or for or on behalf of another person”.575 Thus, where a
person exercises a right he, she or it already possesses,576 as distinct from a right
conferred by the principal,577 no agency relationship will arise.
199
Turning now to specific matters with respect to Vaughan Constructions, the
evidence establishes, in my view, that, contrary to the contention of Woolworths,
Vaughan Constructions was not engaged by NES as an agent to represent it in the
“open book” review process. Consequently, communications between Woolworths
and Vaughan Constructions would not, in themselves, discharge Woolworths’
obligations to communicate with NES by Rider Hunt communicating with Vaughan
571
572
573
574
575
576
577
SC:KS
Gino Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014) 7–8 [1.5]; Colonial Mutual Life
Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41
at 48.
Gino Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014) 7–8 [1.5].
Gino Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014) 5–6 [1.4], 81–9 [4.1]–[4.13].
Gino Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014) 5–6 [1.4], 87 [4.12].
NMFM Property Pty Ltd v Citibank Ltd (2000) 107 FCR 270 at 387 [522].
789Ten Pty Ltd v Westpac Banking Corporation Ltd (2005) 215 ALR 131 at 147 [62].
Jones v Bouffier (1911) 12 CLR 579 at 611.
138
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Constructions.
Rather, the evidence in relation to how Vaughan Constructions
became involved in the open book process is that:
(a)
it was Vaughan Constructions that approached Woolworths directly to go
through its estimates with Woolworths and Rider Hunt, rather than at the
direction of NES;578
(b)
Woolworths, and not NES, arranged to meet with Vaughan Constructions to
review the Vaughan Constructions estimates;579
(c)
NES was not invited to and did not participate in the open book process; and
(d)
the only involvement of NES was that it requested Vaughan Constructions to
make its costings and workings available to Woolworths and Rider Hunt if
Vaughan Constructions was comfortable doing so.580
As to the latter, with respect to the only involvement of NES, the evidence is that
Vaughan Constructions was engaged by NES merely to provide a quote to perform
the work and was asked by NES to make their workings available to Rider Hunt.
This is made clear in an email from Mr Blake to Mr Vaughan, copied to Mr Grigg,
both of Vaughan Constructions, dated 9 March 2010 which, omitting formal parts, is
as follows:581
Costs Estimate under the WOW AfL
Sec. 2 (a)(ii)
Last week I provided Woolworths a copy of your WOW Home Improvement
Centre estimate in accordance with our AfL provision Sec. 2.2 (confidential
extract attached).
I was today advised by my lawyers that my letter to WOW lacked the
necessary detail to properly comply with the requirement of Sec. 2.2.
Item 2.2(a)(ii) required the Landlord to provide its costing on an “open book”
basis. The estimate I provided WOW is not considered to be “open book”. I
am advised that in order to properly fulfil the requirements I am required to
578
579
580
581
SC:KS
Court Book 3074.
Court Book 3090.
Court Book 3083.
Court Book 3083 (emphasis in original).
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provide all the costings to WOW, not just the final figures, or alternately,
access to the workings by WOW in the likely event they will ask their
assessors/QS’ to view the file.
Letter of Offer
Our Letter of Offer from WOW for this site requires us to ascertain the
construction price of a comparable dimensioned “warehouse style hardware
store, (full height pre-cast)” e.g. Bunnings and use that base cost to establish
any amount the Tenant is required to contribute to the construction under Sec
2.2(a)(iii) as the difference between the “Bunnings style” base cost and the
WOW cost.
The current estimate provided by Vaughan allows a range of options not
currently provided under our current comparable hardware store estimate.
Could you please therefore remove the following items from your estimate
and provide a fresh estimate with these items separately itemised:
-
Power authority head works; and
Site levelling with a fall greater than 300mm across the site.
This will assist us in providing comparable estimates.
Comparable Estimate
If you are able would you please assist us by providing a comparable D & C
estimate for an “alternative hardware warehouse” e.g. Bunnings using the
WOW site plan and external dimensions on the following basis:
-
Warehouse of total dimensions 10,738m2 on a 24,700m2 site;
full height pre cast panels;
full architectural documentation;
DA application costs excluded;
power authority head works excluded;
fall no greater than 300mm across the site.
Could you also advise if you are comfortable providing the “open book”
costings for WOW’s inspection.
Please contact me if you have any questions.
200
What was put to Mr Blake with respect to the relationship between NES and
Vaughan Constructions was that the latter had “assisted” NES with its negotiations
with Woolworths in relation to the determination of Landlord’s Works Costs. This
was repeatedly denied by Mr Blake,582 who also denied that Vaughan Constructions
was reporting to NES or keeping it informed.583 Consistently with the position that
NES was not receiving any information from Vaughan Constructions about the
582
583
SC:KS
Transcript 238, 242–3.
Transcript 237, 248–9.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
progress of the discussions is Mr Blake’s repeated requests for feedback on the open
book process, both orally and in writing,584 a position which Mr Macmillan appears
to have accepted in that he admitted that he intended to provide Mr Blake with an
update on the open book process at or prior to the 22 April 2010 meeting.585
201
Mr Blake’s evidence was that the role of Vaughan Constructions was to provide NES
with the quote to construct the Masters store,586 which quote was to be given to
Woolworths to enable Rider Hunt to perform a “cost comparison”,587 and to assist
Woolworths and Rider Hunt in performing that cost comparison;588 thus Mr Blake
said:589
[Vaughan Constructions] were requested to open up their books to Riders so
there could be an open book process, they could look at all the particular
items and determine the differences in costs between a Bunnings and a
Masters store.
This evidence is also, in my view, consistent with Mr Blake’s email of 9 March 2010
to Vaughan Constructions, which is set out above.590 It was also put to Mr Blake that
Vaughan Constructions had updated NES on the open book process. In response,
Mr Blake said:591
No … There was no update provided to me ever by any party whether it be
Woolworths, Riders or Vaughans.
202
Mr Blake also denied that Rider Hunt had updated NES on the process.592
Moreover, Mr Blake said that it was his understanding of the “open book” process
that Woolworths would provide a report that verified the Landlord’s Works Costs
calculations at the end of the open book process.593
When asked by the Court
“[W]ho would present you with the differences in that process?”, Mr Blake
responded “I expected Woolworths to. I had no direct communication with Riders, I
584
585
586
587
588
589
590
591
592
593
SC:KS
Transcript 697.
Transcript 845.
Transcript 243.
Transcript 238.
Transcript 242.
Transcript 243.
Court Book 3083.
Transcript 245. See also Transcript 239, 246.
Transcript 246.
Transcript 246.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
had no contact with Riders, only with Woolworths.”594 Finally, I accept that this
evidence is consistent with the contemporaneous documents which show that NES
repeatedly requested information from Woolworths regarding the outcome of the
open book process; requests which went unanswered.595
203
In cross-examination, Mr Blake was asked how NES was fulfilling its obligation to
negotiate the Landlord’s Works Costs:596
Do you agree that your state of mind at this time was that you, as well as
Woolworths, had an obligation to negotiate the Landlord’s Works Costs
figure, that is the total figure, do you agree with that?---I’m not sure if it was
the total figure or it was the individual items that required negotiation.
But you understood that you had an obligation to negotiate whatever it was?
---Yes.
Tell his Honour how you were fulfilling your obligation to negotiate in that
regard?---Once my final figure had been presented, which was the $12.3-odd
million less the $831,000, which was our final construction figure, we
presented that to Woolworths. We waited and we expected to get a Rider
report, which we never saw. The April 22 meeting where we met with
Michael Graves to talk about those issues, but we waited and we expected
and we looked for figures and we looked for something to talk about but
there was no offer of any report, any result, any substance, nothing. So we
were never able to open negotiations because Woolworths would not
contribute to our discussion.
Clearly, these questions were directed to the attempts that NES had made to resolve
any differences that may have been identified in relation to the Landlord’s Works
Costs.
204
I accept that, as submitted by NES, this evidence was consistent with the evidence of
Mr Macmillan of Woolworths, who admitted that Woolworths had not disclosed its
expectations or any differences it may have had with the NES calculations to NES
and admitted that negotiations to resolve those differences had not taken place.
More specifically:
(a)
When it was put to Mr Macmillan that it was deceptive for Woolworths not to
disclose to NES the Rider reports, Woolworths’ expectations and any issues
594
595
596
SC:KS
Transcript 253.
See Court Book 3094, 3137, 3164, 3170. See also Transcript 289, 306.
Transcript 247.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Woolworths may have had in relation to the Landlord’s Works Costs, Mr
Macmillan said “No … Because at that stage Brendan Blake had Vaughans,
we were using Riders and they were still going through a process of coming
up to where our view of where the Landlord’s Works Costs was going to
be.”597
(b)
When it was put to Mr Macmillan that Woolworths had not communicated to
NES the Rider Hunt report, Woolworths’ expectations or any differences
Woolworths may have had in relation to the Landlord’s Works Costs
estimate, Mr Macmillan said “No, because we were still going through the
process.”598
(c)
When it was put to Mr Macmillan that (as a result) NES was not aware of the
existence of Woolworths’ expectations or any issues Woolworths may have
had in relation to the Landlord’s Works Costs estimate Mr Macmillan said
“[Mr Blake] knew that [Woolworths] were still having ongoing discussions
with Riders and our consultants.”599
(d)
When Mr Macmillan was asked when Woolworths intended to discuss with
NES its expectations and any differences it may have had in relation to the
Landlord’s Works Costs, Mr Macmillan responded “We had the meeting on
… [22 April 2010]. At that time we were going to go through some of the
other matters. I still had to review the Riders report but at that particular
time, that point in time, it then moved very quickly on to, let’s have a look at
now purchasing the site.”600
(e)
When it was put to Mr Macmillan that Woolworths had not discharged its
obligation under the Agreement for Lease to disclose and attempt to resolve
any differences Woolworths may have had in relation to the Landlord’s
Works Costs with NES, Mr Macmillan responded “Well, we hadn’t got to that
597
598
599
600
SC:KS
Transcript 961–2.
Transcript 962.
Transcript 963.
Transcript 963.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
timeframe yet because the deal had changed.”601
In my view, it is clear on the basis of these responses and other evidence to which
reference has been made that it may be inferred that the non-disclosure of
Woolworths’ expectations in relation to costing also included non-disclosure as to its
budget with respect to Landlord’s Works Costs.
205
Returning more specifically to the “relationship” between NES and Vaughan
Constructions, it is to be observed that there was no evidence in the proceeding of
any express or implied agreement or consent on the part of NES to confer on
Vaughan Constructions the authority to negotiate with Woolworths to resolve any
differences Woolworths may have had in relation to the Landlord’s Works Costs;
and the mere fact that Vaughan Constructions was NES’s builder takes matters no
further in all the circumstances.602 On the contrary, as indicated in the preceding
discussion, the only request made by NES was that Vaughan Constructions make its
workings available to Woolworths.603
NES did not request that Vaughan
Constructions act on its behalf in negotiating with Woolworths, nor did Vaughan
Constructions undertake to perform any such duty on behalf of NES. 604 Neither was
there any evidence in the proceeding that Vaughan Constructions had in fact
negotiated or purported to negotiate on behalf of NES, with or without the
knowledge or assent of NES,605 or that NES had ratified any such conduct. There
was no evidence that NES conferred any actual authority on Vaughan
Constructions,606 nor any circumstances in the case that would warrant the
implication of an agency relationship. Also, there was no evidence that NES had any
control over Vaughan Constructions during the open book process; in fact, the
evidence is to the contrary.607
Moreover, the email of Mr Grigg of Vaughan
Constructions to Mr Blake dated 16 March 2010 opens with the words, “As per my
601
602
603
604
605
606
607
SC:KS
Transcript 964.
See Defendants’ Closing Submissions (3 September 2015) [214].
See Court Book 3083.
Cf Morgans v Launchbury [1973] AC 127 at 140–1.
Bonette v Woolworths Ltd (1937) 37 SR (NSW) 142 at 150.
NMFM Property Pty Ltd v Citibank Ltd (2000) 107 FCR 270 at 387 [522].
ACN 007 528 207 Pty Ltd v Bird Cameron (2005) 91 SASR 570 at 595 [110].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
email below and your previous request, we confirm the following items for your
negotiations with Woolworths/Bunnings”.608 The reference to “the email below” is
a reference to an email dated 11 March 2010 from Mr Grigg to Mr Blake (copy to Mr
Vaughan) which, omitting formal parts, is as follows:609
Further to your email request below and our discussions, I confirm we are
currently undertaking the 3 items you have requested as per below:
1.
Cost Estimate under WOW AFL – We confirm that a meeting
with WOW & Rider Hunt has been scheduled for this Friday at
our office to undertake an initial discussion on the difference
between Warehouse Style Hardware Store Specification and
WOW Project Oxygen Specification. At this meeting we will
make available to WOW our Bill of Quantities for inspection
and assessment at our office in an “open book” forum and
discuss any queries. I will contact you following this meeting
to discuss progress and the proposed mechanism for further
investigation on identified differences.
2.
Letter of Offer (Comparable Construction Price) – We are
currently making adjustments to our original cost estimate for
the two deductions you mention below along with deletion of
DA costs and will provide Revised Figure ASAP.
3.
Comparable Estimate for Alternative Hardware Warehouse
(Full height precast on 10,738m2 Bldg area) – We are currently
preparing an Estimate for this option and will confirm our cost
ASAP for your comparable D&C purposes.
Please contact me should you require any further information.
In my view, these emails do, as submitted by NES, confirm that the open book
process did not, of itself, constitute the negotiations between the parties.610
206
Moreover, Mr Macmillan also admitted that the decision maker for NES was
Mr Blake,611 and not Vaughan Constructions and that, ultimately, it was Woolworths
and Mr Blake who had to attempt to resolve the differences and reach agreement.612
Thus, for this and the preceding reasons, there is no basis for the view that it was
reasonable for Woolworths to believe that Vaughan Constructions was acting as the
608
609
610
611
612
SC:KS
Court Book 3133.
Court Book 3134–5 (emphasis in original).
See Outline of Brendan Edward Blake (6 March 2015) [207].
Transcript 909.
Transcript 962.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
agent of NES.613 Neither does a general statement by Mr Blake in cross-examination
that certain actions on the part of Vaughan Constructions were “done on my
behalf”.614 This recognition is further confirmation that Vaughan Constructions was
not acting as the agent of NES and that the open book discussions did not constitute
negotiations with NES for the purposes of cl 2.2 of the Agreement for Lease.
207
For the preceding reasons, I am of the opinion that Vaughan Constructions was not
an agent of NES and that communications between Woolworths, Rider Hunt and
Vaughan Constructions, to which NES was not a party, cannot assist Woolworths in
these proceedings. The participation of Vaughan Constructions in the “open book”
review process did not absolve Woolworths of their obligation to identify and
resolve any differences they may have had with the NES estimate of the Landlord’s
Works Costs with NES which Woolworths failed to do.
Woolworths did not act in good faith to identify and resolve any differences
Woolworths’ unwillingness to engage with NES
208
The evidence to which reference has been made, particularly the documentary
evidence referred to in the immediately preceding discussion, discloses, in my view,
a continued unwillingness on the part of Woolworths to communicate to NES any
differences that it may have had in relation to the estimate by NES of the Landlord’s
Works Costs or of Masters’ contribution to those costs. I am also of the view that the
evidence also reveals a continued unwillingness on the part of Woolworths to
provide NES with any detailed or transparent information in support of its
otherwise bare assertion that the NES estimate was “too high” or “unacceptable”,
that would enable NES to negotiate with Woolworths in any meaningful way to
resolve any differences between them in relation to these calculations.615 This is true
even at the 22 April 2010 meeting, a meeting which was called for the purpose of
attempting to resolve any differences in relation to the Landlord’s Works Costs.616
613
614
615
616
SC:KS
Cf Defendants’ Closing Submissions (3 September 2015) [214]–[221].
See Defendants’ Closing Submissions (3 September 2015) [215].
Transcript 959.
Transcript 845–6.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Mr Macmillan admitted that Woolworths said nothing more, in relation to the
Masters’ contribution amount, than that the $2.94 million that had been sought by
NES was “too high”;617 a position that Woolworths had adopted since receiving the
report in early March.618
209
On Mr Macmillan’s own admission, Woolworths did not put a figure to NES at the
22 April 2010 meeting that would have been acceptable to it,619 and nor did
Woolworths attempt to negotiate620 or actually negotiate621 the Masters’ contribution
with NES at that 22 April 2010 meeting. Moreover, to the extent that a figure of
$1 million may have been put forward,622 such figure could not have been a genuine
attempt to resolve differences, as it was less than one third of the Rider Hunt
estimate provided at the end of the open book process623 and 30 per cent less than
the estimate provided by Rider Hunt on the morning of 22 April 2010.624
Mr Macmillan’s explanation for not negotiating with NES to resolve any differences
it may have had at the 22 April 2010 meeting, namely that he was not given the
opportunity, should, in my view, be rejected.625
As observed by NES in its
submissions, even Mr Macmillan admitted that there were no discussions at that
meeting about whether or not NES would be prepared to negotiate its estimate.626 In
my view, there can be no doubt that had Woolworths wanted to disclose its
differences with respect to costings, or to negotiate them, or to adjourn the meeting
until it was in a position to do so having had the chance to read and consider the
Rider Hunt report delivered on the morning of the 22 April 2010 meeting, it could
easily have done so.
210
Moreover, notwithstanding that Mr Macmillan had received an updated report from
Rider Hunt on the morning of 22 April 2010, before the meeting on that day,
617
618
619
620
621
622
623
624
625
626
SC:KS
Transcript 846–53.
See above [185]–[189].
Transcript 854.
Transcript 853.
Transcript 848.
Transcript 855.
Court Book 3293.
Transcript 857.
Transcript 854.
Transcript 853.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Woolworths took no steps to identify or resolve any differences that it may have had
after the 22 April 2010 meeting. Mr Macmillan admitted that he did not consider the
further Rider Hunt report of 22 April 2010 or meet with Rider Hunt to discuss that
report or to give that report to NES after the 22 April 2010 meeting. Mr Macmillan’s
explanation for not doing so was that there was no reason to “because we were then
considering purchasing the site.”627 This is inconsistent with Woolworths’ pleaded
case that it had in fact discharged its obligations under the Agreement for Lease. As
observed by NES in its submissions, Woolworths does not allege that the Agreement
for Lease was terminated or varied at the 22 April 2010 meeting; and nor could it do
so on the basis of the evidence.628
Furthermore, Mr Macmillan admitted that
Woolworths had not taken numerous steps, including inviting NES to attend and
participate in the open book meetings, disclosing any differences it had identified in
relation to the Landlord’s Works Costs, providing NES with reports and information
it had received from Rider Hunt during the open book process or negotiating any
differences it had identified, each of which Mr Macmillan considered to be
reasonable steps that it might have taken.629 Mr Macmillan said these steps had not
been taken because the process had not reached that stage.630
211
For the preceding reasons, it is clear, in my view, that Woolworths was unwilling to
engage with NES in any meaningful way to discuss and to seek to facilitate the
process of resolving any differences between the parties with respect to the cost
estimates for the Landlord’s Works Costs or Masters’ contribution to those costs.
The effect of Woolworths’ undisclosed budget
212
NES submits that it is open to the Court to find, and the Court should find, that the
reason for Woolworths’ continued unwillingness to engage with NES, from March
2010 until 22 April 2010, was that Mr Macmillan was not free to negotiate a Masters
contribution amount that exceeded Woolworths’ undisclosed budget. Moreover, it
627
628
629
630
SC:KS
Transcript 859–60.
Transcript 1056.
Transcript 689.
Transcript 718.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
is submitted that the Court should infer that the only “stage” at which Mr Macmillan
would have engaged with NES in relation to any differences was if Woolworths,
Rider Hunt and Vaughan Constructions had been able to reduce the construction
costs to the point where the Masters’ contribution was less than the $1.7 million
Woolworths budget and where the Landlord’s Works Costs were in line with
Woolworths’ (also undisclosed) construction cost target of $12 million based on a
13,500 square metre store; which Mr McDonald admitted that he and Woolworths
were working towards.631 Moreover, as NES observes, the $12 million generic target
would be less than $10 million on a pro rata basis for the 10,738 square metre Bendigo
store. Further, the Landlord’s Works Costs reached by Rider Hunt and Vaughan
Constructions by 18 April was $11,516,809.632 Thus, where the true cost difference to
construct a store to Masters’ specifications far exceeded the $1.7 million budget,633
Mr Macmillan could never have discharged Woolworths’ obligations under cl 2.2 of
the Agreement for Lease, and certainly not within the six week period contemplated
by cl 2.2(c)(ii) of the Agreement for Lease, and not without successfully putting a
business case to the Woolworths Property Committee for approval of a higher sum,
which he never attempted to do.
213
For the preceding reasons and the reasons advanced by NES and the material relied
upon in relation to the undisclosed budget issue, I do draw the inferences which
NES seeks the Court to draw in this respect. Moreover, having regard to the matters
to which reference has been made, I reject the Woolworths submission that there
remains any issue with respect to puttage to Mr Macmillan.634
214
NES also contends that it is open to the Court to find, and that the Court should find,
that the reason Woolworths did not take reasonable steps to engage with NES to
resolve differences in relation to the Masters’ contribution after the 22 April 2010
meeting, but before termination of the Agreement for Lease, was because
Mr Macmillan mistakenly believed that the effect of Mr Blake having offered to sell
631
632
633
634
SC:KS
Court Book 5698. See also Transcript 1278, 1284, 1288, 1311, 1352.
Court Book 3393.
See the letter from Fetter Gdanski to Allens Arthur Robinson dated 6 April 2010: Court Book 3345.
Cf Transcript 1468.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the land to Woolworths as an alternative relieved Woolworths from its obligations
under the Agreement for Lease. I accept that Mr Macmillan’s evidence would tend
to support this inference, though having regard to the broader evidence and the
matters already considered in these reasons, prior to the 22 April 2010 meeting, the
meeting itself and subsequent matters, I accept that Mr Macmillan may well have
been mistaken in this respect, but this does not, however, detract from the position
that even in light of the further Rider Hunt report received on the morning of
22 April 2010—prior to the meeting held on that day—no further attempt was made
to discuss the position of the parties with respect to cost estimates underlying the
calculation of the Landlord’s Works Costs. In my view, this aspect is emphasised
when it is considered that even when Woolworths decided that the purchase of the
site was not an attractive option, there was, even then, no apparent inclination to
revisit the further Rider Hunt report and to pursue discussions to attempt to resolve
differences with respect to the Landlord’s Works Costs.
215
Consequently, it would appear to be the case that Woolworths had set an internal
budget that limited the amount that Woolworths would contribute to the
construction costs of $1.7 million,635 at a time when the true cost difference between
constructing a store to Masters’ and Bunnings’ specifications was not known, and by
requiring Mr Macmillan to operate within that budget unless there was some
business case that warranted an increase.636 In spite of the fact that the true cost
difference far exceeded that amount,637 Woolworths, through Mr Macmillan, was not
able or willing to engage with NES in the way that the Agreement for Lease, which
did not contemplate any budget, required of Woolworths.
216
For these reasons, the finding of the Court follows that Woolworths failed or refused
to take those steps, such as inviting NES to participate in the “open book” process,
communicating any differences that were identified during that process and actively
seeking to resolve those differences, that a reasonable person, who had the sole
635
636
637
SC:KS
Transcript 1124.
Transcript 1148.
See the email of 29 March 2010 from Mr McDonald of Rider Hunt to Mr Killesteyn, copied to
Mr Macmillan, of Woolworths: Court Book 3293.
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object of cl 2.2(b) of the Agreement for Lease in mind—being to identify and resolve
differences in relation to the Landlord’s Works Costs and the Masters contribution—
would have taken in order to identify and resolve differences in relation to the
Masters contribution, because to do so would have been inconsistent with its
approved budget and business case, being some other object not contemplated by
the Agreement for Lease. Thus, the finding also follows that, acting with some other
object in mind, and not being faithful to the contractual obligation in cl 2.2 of the
Agreement for Lease, Woolworths breached its obligation to act reasonably and in
good faith in accordance with cl 2.2(b) of the Agreement for Lease.
Other matters affecting Woolworths’ performance of its obligations
217
NES contends that there were, in addition to the matters already discussed, a
number of other objectives or considerations that it is open for the Court to find, and
that the Court should find, Woolworths took into account when performing its
obligations—or purporting to perform its obligations—under cl 2.2 of the Agreement
for Lease. It is submitted that these matters were certainly operative, as, it may be
inferred, was the inability to bring construction costs within budget, in the decision
by Woolworths to terminate the Agreement for Lease. Further issues are raised with
respect to the decision to terminate, issues which are discussed further in the reasons
which follow.
Pursuit of the Hume & Iser site
218
NES contends that it is open to the Court to find—on the basis of Woolworths’ own
contemporaneous documents to which reference has already been made—and that
the Court should find that, by at least 16 March 2010 and well before the open book
process had been completed or negotiations had taken place with NES, Woolworths
had decided to abandon the Strathdale site in order to pursue another, strategically
important, site in Bendigo.
219
SC:KS
The evidence is that on 9 March 2010, well before the Rider Hunt open book review
151
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
had been completed, Mr Danks, together with Mr O’Brien from Woolworths638 and
others met with Mr Iser to discuss the potential purchase of the Hume & Iser site by
Mr Danks. The significance of these discussions in terms of the present proceedings
appears clearly from the email of 24 April 2010 from Mr Danks and to Mr Macmillan
which, omitting formal parts, is as follows:639
Thanks for your note—I have only just logged on at 23:15 Friday evening (ie
Sat 08:00 your time) I now understand much better the situation around the
McIvor Hwy site
As I told you on the phone this morning, we both need to work with Stephen
Iser, as unfortunately he has not [moved] forward very much since our
meeting with Grant O’B on Tues 9 March
I understand Stephen has discussed the idea of either
 doing a joint venture with an option to purchase the business and site
 and/or a straight sale of the business
with his independent Chairman but has not shared everything with his
whole Board
Stephen is very concerned with keeping any discussions very confidential
Tim, your knowledge and relationship with the Bendigo Council I am sure
will be a great help in moving this project forward.
I do not know if you have had a full briefing on the Hume & Iser meeting
and/or the discussions with GOB, Mark Fleming & David Hunt were also
present at the meeting, they maybe of [some] help for back grounding If not,
you and I can share notes as we move forward
Stephen has previously held discussions [with] Bunnings, signed a CA,
shared all his figures and then nothing happened for months, I think this all
took place in second half of 2009
He decided to share this information with Danks in late Feb 2010
After the meeting with GOB, Stephen was wanting to immediately go back &
tell Bunnings that he was having discussions with another party—I strongly
counselled him NOT to do this, I believe he has not anything further along
this line
Can I strongly suggest you have Stephen sign a WOW Confidentiality
Agreement, to lock him into exclusive discussions for a period and to
reassure him that these discussions are very serious—I am sure Mark F can
help with this
I would also suggest you mention this prior to meeting with him, so it is not a
shock to him
As a reminder, Stephen will be away in the USA from approx 29 April
638
639
SC:KS
Court Book 3085.
Court Book 3421.
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Stephen has also suggested that he would like to get together with you this
coming week if suits you both
I hope these notes are of some help to you and I look forward to hearing how
you go with your discussions
220
Following the meeting on 9 March 2010 between Mr O’Brien, Mr Fleming and Mr
Hunt from Woolworths, Mr Danks and Mr Iser (none of whom were called to give
evidence) but before termination of the Agreement for Lease:
(a)
Mr Iser discussed the idea of doing either a joint venture with Woolworths
with an option for Woolworths to purchase the business and site or a straight
sale of business to Woolworths with the Independent Chairman of Hume &
Iser but not the whole Board (as is clear from the 24 April 2010 email, set out
above);640
(b)
Mr Danks had spoken to Mr Macmillan about Hume & Iser. Following that
discussion Mr Danks had said to Mr Iser that Woolworths was “very keen to
discuss your plans to redevelop the [Hume & Iser] site sometime in the
future”;641
(c)
Mr Danks and Mr Macmillan had agreed that Oxygen would walk away from
the Bendigo site in order to progress the Hume & Iser site as an Oxygen site,
as it was thought to be in a better location and would be supported by the
Council;642
(d)
Mr Danks had provided Mr Macmillan with Mr Iser’s mobile number and
private email address and requested that Mr Macmillan have Mr Iser sign a
confidentiality agreement to prevent him from reporting back to Bunnings
that he was having discussions with Woolworths;643
(e)
Mr Macmillan had sent Mr Iser a confidentiality and exclusive dealing
agreement with an exclusive dealing period of six months and a three month
640
641
642
643
SC:KS
Court Book 3421.
Court Book 4685.
Court Book 3422.
Court Book 3421.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
extension;644
(f)
Mr Macmillan and Mr Iser had met personally and Mr Iser had agreed to
send Mr Macmillan a design plan for the Hume & Iser store.645 At that
meeting Mr Iser had said to Mr Macmillan that he was “very interested in
progressing negotiations with Oxygen” and that he had executed the
confidentiality and exclusive dealing agreement Mr Macmillan had sent
him;646
(g)
Mr Iser sent Mr Macmillan his private email address so that they could
“communicate without the risk of anyone looking”;647
(h)
Mr Iser had sent Mr Macmillan draft plans of a potential redevelopment of
the Hume & Iser site which Mr Macmillan was sending to an architect to have
further schemes undertaken;648
(i)
Mr Iser and Mr Macmillan had agreed to meet with the CEO and Strategic
Planner of the Council (on Mr Iser’s return from overseas);649 and
(j)
Mr Macmillan had held telephone discussions with Council officers who were
very supportive of a potential development of the Hume & Iser site and had
advised that they would assist. Mr Macmillan described the above as a “good
start!”650
221
Following the meeting of 9 March 2010 with Mr Danks but before termination of the
Agreement for Lease:
644
645
646
647
648
649
650
651
SC:KS
(a)
The Property Committee resolved to pursue that site on 16 March 2010.651
(b)
The status of the Bendigo site following the Property Committee meeting that
Court Book 3427, 4688.
Court Book 4686.
Court Book 3427.
Court Book 4687.
Court Book 3427, 4486.
Court Book 3427.
Court Book 3427.
Court Book 3138, 3141.
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day had changed to: “Landlord has funding issues. Alternative site being
pursued. Check the legal position in relation to negotiations on site.”652
(c)
The minutes of the Property Committee on 6 April 2010 stated that: “Deal
likely to fall over”.653 The Matters Arising Log stated: “Landlord has funding
issues. Alternative site being pursued. Check legal position in relation to
negotiations on site.”654
(d)
By 23 April 2010 Mr Macmillan said to Mr Danks by email that Woolworths
was willing to walk away from the Bendigo site. Mr Macmillan’s email goes
on to state:655
The preference is to progress the Hume and Iser site as an Oxygen site, as this
site is in a better location and I believe would be supported by Council.
Council are extremely supportive of Oxygen coming to Bendigo, however not
on the currently proposed site in Bendigo. I think that Council would be
extremely supportive of us doing a development with Hume & Iser and this
scenario was even brought up by the Head of Planning at Bendigo Council. I
think it could be a good outcome for Council for us to abandon the proposed
location (we could use this as leverage) and work with Hume and Iser on their
site and I am sure that they would consider supporting a road closure. The
Council are quite competitive with Ballarat and Geelong and do not want to
miss out.
(f)
By 24 April 2010 Mr Danks had said to Mr Iser that: “Woolworths are very
keen to discuss further your plans to develop the [Hume & Iser] site sometime
in the future”.656
(g)
By 30 April 2010 Mr Macmillan had sent Mr Iser a confidentiality and
exclusive dealing agreement with an exclusive dealing period of six months
and a three month extension.657
(h)
652
653
654
655
656
657
SC:KS
The minutes of the Property Committee meeting on 4 May 2010 stated that:
Court Book 3141. See also Court Book 3138.
Court Book 3348, 3357.
Court Book 3351, 3355.
Court Book 3422 (Plaintiff’s emphasis).
Court Book 4685.
Court Book 3427, 4688.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
“Deal on Bendigo will fall over. Pursuing alternative site”.658 No Matters
Arising Log has been discovered in relation to this meeting.
222
The position at this stage was that unless Woolworths had decided to abandon the
Bendigo site the strategy of pursuing the acquisition of the “alternative” Hume &
Iser store was inconsistent with Woolworths’ Property Committee decision that
Woolworths would pursue only one store in Bendigo.659
Woolworths did not
contend that it intended to pursue both sites in Bendigo. Indeed, to do so would
have been contrary to Woolworths’ Home Improvement Strategy
which
contemplated Woolworths protecting and growing Danks’ key Home Timber &
Hardware store customer base660 and avoiding or minimising competition, which
was described as a “clash of trade” or “cannibalisation”, between Oxygen and trade
focussed retail stores.661 As the evidence referred to in the preceding discussion
indicates, Woolworths then actively pursued the acquisition of the Hume & Iser site
for several years before negotiations broke down.
223
Mr Macmillan’s evidence to the effect that he advised Mr Champion the Agreement
for Lease could not be terminated in order to pursue the Hume & Iser store and that
his advice somehow altered the Property Committee’s decision, which was then remade on a different basis once no agreement could be reached on the Landlord’s
Works Costs,662 does, in my view, lack credibility and is inconsistent with the
contemporaneous documents which show no such change in the position by the
Property Committee;663 with the reason for the decision remaining unchanged in the
Matters Arising Log throughout.664 I accept that Mr Macmillan’s evidence that the
Hume & Iser store was only considered as a potential site for a Masters store after
the meeting on 22 April 2010,665 is equally incredible in light of the contemporaneous
documents, including the Minutes and Matters Arising Logs of the Property
658
659
660
661
662
663
664
665
SC:KS
Court Book 3435.
Court Book 1231.
Court Book 4722, 4724, 4738.
Court Book 4724.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [85]. See also Transcript 902–3.
Court Book 3141, 3153.
Court Book 3138, 3141, 3153, 3142, 3148, 3357, 3348, 3351.
Transcript 671.
156
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Committee. The suggestion that Mr Macmillan formed the views set out in his email
to Mr Danks on 23 April 2010 in less than 24 hours after the 22 April 2010 meeting, is
also inherently implausible.666 Moreover, to the extent that Mr Macmillan’s evidence
contradicts the formal Minutes and Matters Arising Logs of the Property Committee,
this evidence is rejected. Moreover, the position that Woolworths chose not to call
Mr O’Brien or any attendee at the 9 March 2010 meeting which led to the Property
Committee decision to pursue the alternative site to give evidence in the proceeding
without any explanation also supports the inference, open on the Minutes and
Matters Arising Logs, that a decision had been made by Woolworths to pursue the
Hume & Iser site by at least 16 March 2010.667
224
Following the termination of the Agreement for Lease by Woolworths, the
negotiations carried on between Woolworths, Mr Danks and Mr Iser:
(a)
By 30 June 2010, not long after the termination of the Agreement for Lease by
Woolworths, Woolworths had obtained the financials of the Hume & Iser
business from Mr Iser. Mr Hunt of Woolworths referred to the Hume & Iser
business as the “business we intend to [b]uy, excluding land, the owner will
develop for us in the future. Bunnings is also looking at the business … Can
we calculate a purchase price”;668
(b)
By early August 2010 a valuation report had been prepared by Woolworths
valuing the Hume & Iser land and business at $5.225 million;669 and
(c)
Between 2010 and 2012 various offers were made to acquire the business.
These offers included:
(i)
Offers were made by Hume & Iser to sell the business to Danks 670 which
were rejected by Danks;671
666
667
668
669
670
671
SC:KS
Court Book 3422.
CAJ Investments Pty Ltd v Lourandos (1996) 83 FCR 189 at 198; Jones v Dunkel (1959) 101 CLR 298.
Court Book 4712.
Court Book 4713.
See, eg, Court Book 4754, 4756.
Court Book 4758.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(ii)
A proposal by which Hume & Iser would run the store until 2015, after
which it would become the Masters Bendigo Store;672
(iii)
Offers by Danks to acquire the business and property or for Hume &
Iser to retain the properties and sell the business as a going concern;673
(iv)
By December 2011, there was still suspicion that Bunnings was well
advanced in its discussions with Hume & Iser;674
(v)
Ultimately by 16 February 2012 the Hume & Iser Board had rejected all
offers from Danks and had resolved not to entertain any further
offers;675 and
(vi)
In April 2012, Woolworths was politely asked not to “bother” Hume &
Iser any further. At that time, Woolworths may have identified another
site in Bendigo.676 There is presently no Masters store in Bendigo.
225
For these reasons, I am of the view that in breach of cl 2.2(b) of the Agreement for
Lease, another reason that Woolworths did not take all reasonable steps to identify,
communicate and resolve any differences it may have had in relation to the
Landlord’s Works Costs, was that, before the open book review process could be
completed or any differences identified, the Property Committee had decided, for
strategic reasons, to terminate the Agreement for Lease and pursue the Hume & Iser
site instead.
In reaching this position, primary reliance has been placed on
contemporaneous documents. It is a conclusion reached on this basis and not, as
Woolworths contends, the product of characterising the contentions of NES with
respect to this issue as, in effect, allegations of some conspiracy on the part of
Woolworths and various individuals.677
672
673
674
675
676
677
SC:KS
Court Book 4759.
Court Book 4768, 4774, 4778.
Court Book 4770.
Court Book 4789.
Court Book 4787, 4791.
Defendants’ Closing Submissions (3 September 2015) [252]–[260].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Other considerations
226
By the time Mr Macmillan received the NES estimate of the Landlord’s Works Costs
in March 2010, he had become aware of a number of other issues or potential issues
in relation to the development of the Strathdale site, including opposition from the
Council and residents, and potential funding issues with NES. This was also at a
time when Woolworths was faced with having to pay a contribution amount that
exceeded its approved but undisclosed budget678 and at a time when the Property
Committee had decided to pursue an alternative store.679
These matters were
irrelevant to the obligations and powers imposed and conferred on Woolworths
under the Agreement for Lease, but, nevertheless, the evidence does support the
view that they affected the discharge of its obligations under that agreement. NES
cites, by way of example, in this respect the minutes and the Matters Arising Logs of
the Property Committee of 16 March, 6 April, 23 April and 11 May 2010, all of which
pre-date termination of the Agreement for Lease and all of which include the
references “Landlord has funding issues. Alternative site being pursued”680 and
“Council not supportive”.681 Significantly, no reference is made in these documents
to Woolworths and NES being unable to resolve any differences identified in relation
to the calculation of the Landlord’s Works Costs or the Masters contribution.
Greater Bendigo City Council opposition
227
Mr Champion’s notes, dated 6 May 2010, made immediately before the termination
of the Agreement for Lease, record, that: “The grounds are that the parties have not
reached agreement on cost of building. Reality is that Council will not support that
site.” The note then stated: “The Hume and Iser site is the larger & successful Home
Hardware … very interested in selling to us”.682 This note is consistent with the
notations in the Woolworths Corporate Property Reports which also noted Council
opposition.683
678
679
680
681
682
683
SC:KS
Court Book 4490.
Court Book 3138, 3141.
Court Book 3138, 3141, 3351.
Court Book 4682, 4702.
Court Book 4046.
Court Book 4682, 4702.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
228
NES contends that it is open to the Court to find, and the Court should find, that in
addition to the approved budget and the decision to pursue the Hume & Iser site,
Woolworths also took into account that there was opposition from the Council in
performing its obligations under the Agreement for Lease, including exercising its
power to terminate the Agreement for Lease and without first having identified,
communicated and sought to resolve any differences Woolworths may have had in
relation to the calculation of the Landlord’s Works Costs and the Masters
contribution amount.
229
Mr Champion did, however, seek to explain the 6 May 2010 note on the basis that
the use of the word “reality” meant “in any case” or “in addition to”.684 However, as
submitted by NES, this is not an interpretation open on the plain language of the
handwritten note and, NES submits, does Woolworths little credit and should be
rejected.
Further, it is submitted that the meaning of Mr Macmillan’s
contemporaneous handwritten note is clear—the “real” reason for Woolworths
terminating the Agreement for Lease was not any inability to reach agreement on
commercial terms, but that the Council would not support the Bendigo development
in circumstances where the larger, more successful, Hume & Iser store—which the
Council did support—had already been identified and a decision made by
Woolworths to pursue that store. Mr Champion admitted that any lack of Council
support was not a valid reason for terminating the Agreement for Lease.685
Mr Champion did say, however, in his evidence that Council approval was not part
of the reason for “pulling” the Bendigo site.686 This is, however, as NES submits,
contrary to the contemporaneous documentary evidence and clearly at odds with
the plain words of the contemporaneous note of Mr Champion dated 6 May 2010.687
Accordingly, I find that Woolworths did take into account Council opposition in
performing its obligations under the Agreement for Lease, including exercising its
power to terminate the Agreement for Lease. In other words, the inferences in this
684
685
686
687
SC:KS
Transcript 1206, 1209–10.
Transcript 1217.
Transcript 1214. See also Court Book 4046.
Cf Defendants’ Closing Submissions (3 September 2015) [292]–[296].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
respect should be made as submitted by NES.
Financial position of NES
230
NES submits in this respect that the references to “Landlord has funding issues” in
the Minutes and Matters Arising Logs of the Property Committee to which reference
has been made indicate that Woolworths also took into account—in discharging its
obligations and exercising its powers under the Agreement for Lease—a
misperception that NES may have had funding issues. For the reasons which follow,
and having regard to the evidence to which reference is made, I am of the opinion
that this is correct.
231
The concerns with respect to NES’s funding issues appear to stem from an email sent
by Mr Blake to Mr Macmillan, stating that they should “talk about financing this
development at some stage.”688 In order to obtain a clearer picture of the nature of
this communication—the import of this quoted passage—the context of the email of
16 November 2009 in which it appears should be considered. Omitting formal parts,
the contents of that email are as follows:689
Just to advise that I have today received the contract from the vendors
lawyers for 203 McIvor Rd. My lawyer is pleased with the docs.
I’ve briefly read the contract tonight and all looks to be in order. I’ll check it
again in detail and if all is well, sign this week.
My lawyers are pushing the vendor of 201 and she is being assisted in her
decision by her family...! [Her] lawyer understands the urgency and we have
asked for contracts to be signed this week.
Tim, obtaining finance for projects like this is becoming increasingly difficult
in the current climate. Banks and financiers are very nervous. The
Woolworths model is untested and may raise other issues as we apply for
development finance.
Let’s talk about financing this development at some stage.
It should be remembered, of course, that 16 November 2009 was around the time of
the aftermath of the global financial crisis, so it is not surprising that there should be
some reference to difficulties in obtaining finance for development projects.
688
689
SC:KS
Court Book 2008.
Court Book 2008.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
232
In any event, the evidence of Mr Blake and Mr Macmillan differed significantly in
relation to this question. Mr Blake’s evidence was to the effect that he had asked
Mr Macmillan once whether Woolworths would consider funding the Strathdale
development, but when Mr Macmillan said “no”, there was no further discussion of
this topic.
Mr Blake’s evidence was that he asked Mr Macmillan whether
Woolworths would be prepared to fund the development, not because NES could
not obtain funding elsewhere, but because Woolworths may have been prepared to
provide the funding without the need for cross-collateralised securities, as
Woolworths had done in the past for a development at Kennington Village.690
Mr Macmillan’s evidence, on the other hand, at least his oral evidence, was to the
effect that Mr Blake had asked several times whether Woolworths would fund the
development and that he had said to him that NES was having funding issues. 691 As
NES observes in its submissions, why Mr Blake would have told Mr Macmillan this
long before funding was needed for the development, when Mr Blake was confident
that the Bendigo Bank would fund the development, which Mr McGregor and
Mr Stockwell of that Bank confirmed in their evidence, make this evidence by
Mr Macmillan implausible, to say the least. Moreover, it also would seem a very
unlikely comment from someone in Mr Blake’s position who was seeking to pursue
a development with a corporation such as Woolworths in circumstances where his
ability, and the strength and capacity of his corporate entities would likely have been
a factor which Woolworths would have considered before entering into agreements
with him.
233
In any event, to the extent that it is necessary to make a finding in relation to this
issue, I am of the opinion that “on the grapevine”, Mr Macmillan became aware that
there had been an issue with another development between Mr Blake and
Woolworths, Kennington Village692 which had resulted in another entity associated
with Mr Blake defaulting on a loan from Woolworths and the development being
acquired and completed by Woolworths. Mr Macmillan wrongly assumed that the
690
691
692
SC:KS
Transcript 185.
Transcript 899, 1177.
Transcript 1173.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
issues with that development were caused by NES experiencing financial difficulties.
In actual fact, Mr Blake did not complete the Kennington Village development as he
was unable to obtain the planning approvals necessary to construct the
development.693
There were also communications with respect to whether the
Agreement for Lease was related to or otherwise dependent on other transactions
between Mr Blake’s companies and Woolworths; including with respect to a
property in Redan (in Ballarat). Woolworths asserted no relationship or dependence
and these matters were carried no further—and do not impinge on the present issues
or discussion.694
234
It also seems likely, as NES submits, that Mr Macmillan’s concerns about the ability
of NES to obtain funding may also have been relevant to the decision by
Woolworths to pursue the Hume & Iser store695 and may have prompted
Woolworths to obtain legal advice about their position in relation to the negotiations
with NES.696 Finally, I am of the opinion that one of the most telling points in
relation to this particular issue is that, despite any concerns which Mr Macmillan
and Woolworths now say they had, there is no evidence of any attempt being made
by Woolworths to verify the financial position of Mr Blake or NES.697 It is almost
inconceivable that a corporation such as Woolworths, if it had any real concern in
relation to the financial capacity of an entity with which it was dealing, would not
make any inquiries to attempt to verify the financial position of that entity.
235
Concluding in relation to this issue, whether or not Mr Macmillan’s fears about
NES’s financial position were genuinely held,698 this was not a matter that
Woolworths was entitled to take into account when exercising its powers and
performing its obligations under the Agreement for Lease. It was a matter for
Woolworths to assess before entering into the Letter of Offer and the Agreement for
693
694
695
696
697
698
SC:KS
Transcript 187.
See Court Book 2854, 2856, 3072. See also Defendants’ Closing Submissions (3 September 2015) [194]–
[200].
Transcript 1176.
Court Book 3138. See also Transcript 1176.
Transcript 736, 1175–7.
See Defendants’ Closing Submissions (3 September 2015) [194]–[213].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Lease and, on the evidence, Woolworths clearly entered into those agreements with
no such concerns. Neither does it affect the position in the present proceedings that
Mr Blake may have expressed an interest in selling the Strathdale site and
communicated with potential purchasers (including Bunnings)—quite apart from
the suggestion, made at the 22 April 2010 meeting, that it might be sold to
Woolworths—there being no evidence that NES did or intended to act contrary to
the terms of the Agreement for Lease. Moreover, in the absence of any evidence of
any act or intention contrary to the Agreement for Lease, there is no basis for the
contention by Woolworths that there is any basis to impugn negotiations or conduct
by Mr Blake on behalf of NES with respect to the process as required under cl 2.2 of
that agreement.699
Agreement for Lease terminated by Woolworths for reasons not contemplated by its
terms
236
As discussed in the preceding reasons, it is clear on the contemporaneous
documentary evidence that well before the open book review of the Vaughan
Constructions estimate had been completed on 1 April 2010, and well before
negotiations between NES and Woolworths to resolve any differences in relation to
the Landlord's Works Costs were to have been completed (on 20 April 2010, then
extended), Woolworths had decided to terminate the Agreement for Lease and to
pursue the acquisition of the Hume & Iser site.
237
The reasons for Woolworths termination of the Agreement for Lease were recorded
in Woolworths’ own internal documents as follows:
(a)
The Minutes of the Property Committee (of which Mr O’Brien and Mr
Champion were members) and the Matters Arising Log for 16 March 2010
state that: “Landlord has funding issues.
Alternative site being pursued.
Check the legal position in relation to negotiations on site.”700
(b)
699
700
SC:KS
The Minutes of the Property Committee on 6 April 2010 state that: “deal likely
See Defendants’ Closing Submissions (3 September 2015) [210]–[211].
Court Book 3138, 3141, 3143, 3153, 3142.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
to [fall over]”.701 The Matters Arising Log states: “Landlord has funding
issues.
Alternate site being pursued.
Check legal position in relation to
negotiations on site.”702
(c)
The table setting out the status of the various sites dated 23 April 2010 records
a 41 to 60 per cent likelihood of completion on 23 April 2010 with the added
notation: “Council not supportive”.703
(d)
The Minutes of the Property Committee on 4 May 2010 state that: “Deal on
Bendigo will fall over. Pursuing alternative site.”704 No Matters Arising Log
has been discovered.
(e)
On 11 May 2010 the table setting out the status of the various sites continued
to report a 41 to 60 per cent likelihood of completion stating the reason:
“Council not supportive.”705
(f)
The email from Mr Macmillan and Mr Danks on 23 April 2010, referred to
above states:706
The agreement for the Oxygen site at Bendigo expires on 4 May. Oxygen
is willing to walk away from the site for the following reasons:

Council are not supportive of the Home Improvement use on the
McIvor Hwy site. They wish to have the site rezoned to residential.

There will be significant resistance to the proposal from the abutting
residential community (including the Federal member of parliament)

The developer has optioned up the land for too much money, has
funding issues and we cannot agree on finalising commercial terms.
The preference is to progress the Hume and Iser site as an Oxygen site, as
this site is in a better location and I believe would be supported by
Council.
Council are extremely supportive of Oxygen coming to Bendigo, however
not on the currently proposed site in Bendigo. I think that Council would
be extremely supportive of us doing a development with Hume & Iser
701
702
703
704
705
706
SC:KS
Court Book 3348, 3435.
Court Book 3351, 3355.
Court Book 4682.
Court Book 3435.
Court Book 4702.
Court Book 3422.
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and this scenario was even brought up by the Head of Planning at
Bendigo Council. I think it could be a good outcome for Council for us to
abandon the proposed location (we could use this as leverage) and work
with Hume and Iser on their site and I am sure that they would consider
supporting a road closure. The Council are quite competitive with
Ballarat and Geelong and do not want to miss out.
(g)
Mr Champion’s handwritten notes from the day of termination stated:707
Agreement to lease the currently approved site expected to fall over
today. The grounds are that the parties have not reached agreement on
cost of building.
Reality is that Council will not support that site. Landlord offered to sell
for $6.3m ~ 500k margin. We have politely declined.
The Hume and Iser site is the large & successful Home Hardware—very
interested in selling to us …
Notwithstanding the passing reference in Mr Macmillan’s email of 23 April 2010 and
in Champion’s handwritten note to agreement on commercial terms, it is clear from
these documents, which pre-date any termination, that Woolworths had decided to
terminate the Agreement for Lease for reasons other than any genuine disagreement
about the amount of the Landlord’s Works Costs. It is also telling that each of the
reasons to which reference has been made—save for the passing references by Mr
Macmillan and Mr Champion—arose before the review of the Vaughan
Constructions quote had been completed and before any negotiations had taken
place. So, too, had the decision of the Property Committee to pursue the Hume &
Iser site. In any event, Woolworths was not entitled to terminate the Agreement for
Lease on any of these bases, matters to which I now turn in some further detail.
238
NES submits that it is open to the Court to find on the evidence, and that the Court
should find, that each of the matters which have been discussed in the preceding
reasons, including that the Masters contribution was likely to exceed Woolworths’
approved but undisclosed budget, that the Property Committee had decided to
pursue the Hume & Iser store, that the Council was not supportive of the Bendigo
development and that there were fears that NES may be experiencing funding
issues, were all matters that Woolworths took into account in deciding to terminate
707
SC:KS
Court Book 4046.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the Agreement for Lease.
For the preceding reasons and for those which now
follow, I am of the view that the findings contended for by NES are properly made.
239
In support of its contention, NES says that the fact this was the case is evident from
the email from Mr Macmillan to Mr Danks on 23 April 2010, which, is set out in full
above.708
As indicated in the preceding reasons, these were not issues that
Woolworths was permitted to take into account in performing its obligations or
exercising its powers under the Agreement for Lease, but the evidence is that it did
so, and this email reinforces that assessment.
240
In his oral evidence, Mr Macmillan sought to draw a distinction between the reasons
Woolworths decided to reject the offer of NES at the 22 April 2010 meeting to sell the
Strathdale site to Woolworths, rather than the reasons for Woolworths terminating
the Agreement for Lease.709 However, in the context of the evidence which has been
considered, this distinction is simply not credible and, in my view, is an attempt to
rationalise and justify the decision for termination of the Agreement for Lease in
circumstances where these extraneous considerations were treated by Woolworths
as relevant matters with respect to that decision.
241
As has been discussed in the preceding reasons, the contemporaneous documentary
evidence suggests that Woolworths considered it likely, if not inevitable, that
negotiations with NES would fail well before the open book process was completed
or any such negotiations had taken place. This is reflected in repeated comments in
the Minutes of the Property Committee that the deal is “likely to fall over”.710
Despite the assertion that these Minutes may be inaccurate,711 Mr Champion
confirmed that the Property Committee held the view expressed in the Minutes at
that time.712 Mr Champion’s evidence that these entries followed conversations with
Mr Macmillan in March 2010 in which Mr Macmillan reported to him that
708
709
710
711
712
SC:KS
See above [237(f)].
Transcript 939.
Court Book 3348, 3435, 3357.
Transcript 938.
Transcript 1203.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
negotiations were not progressing well713 suggests that the negotiations in question
were not negotiations between Woolworths and NES, as Mr Macmillan admitted
that no such negotiations had yet taken place.714
If the progress of any such
“negotiations” was in fact the origin of these entries, the negotiations in question can
only have been negotiations between Woolworths and Rider Hunt on the one hand,
and Vaughan Constructions on the other, to try and bring the construction costs
within Woolworths’ approved but undisclosed budget. NES had no involvement in
any such negotiations, nor were they negotiations contemplated by the Agreement
for Lease; which made no reference to the Woolworths budget. Consistent with such
an inference, Mr Champion’s evidence was that, if Mr Macmillan formed the view
that he could not achieve a deal within the parameters prescribed by the Property
Committee, including the $1.7 million budget, “there was no obligation for him to
continue to do so.”715 Mr Champion’s evidence was that in such circumstances, Mr
Macmillan was authorised to terminate the Agreement for Lease, without referring
that decision to the Property Committee.716
Conclusion in relation to liability
242
Woolworths was not free to terminate the Agreement for Lease to pursue the
acquisition of an alternative site, having agreed to lease the Masters store from NES
at a price that was based on the price to construct the store to Bunnings’
specifications and having agreed to pay the difference between that cost and the
actual cost to construct a Masters specification in a lump sum, once known. In my
opinion, it is clear that Woolworths knew very well, both for the reasons discussed
in the preceding reasons and from advice it sought from its solicitors following the
decision of the Property Committee to pursue the Hume & Iser site,717 that it was not
free to terminate the Agreement for Lease under cl 2.2(c) unless it had first acted
reasonably and in good faith to resolve any differences it may have had in relation to
713
714
715
716
717
SC:KS
Outline of Evidence of Richard Charles Douglas Champion (27 February 2015) [21].
Transcript 913.
Transcript 1085.
Transcript 1148.
Court Book 3138, 3141, 3351.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the estimate by NES of the Landlord’s Works Costs or the Tenant’s contribution to
those costs and no agreement could be reached.
243
On its proper construction, having regard to the terms of the Agreement for Lease
and the factual circumstances in which it was entered into, cl 2.2 of the Agreement
for Lease is not an agreement merely to negotiate.
It is an agreement to act
reasonably and in good faith in an attempt to resolve differences in relation to the
estimate by NES of the Landlord’s Works Costs. Clause 2.2 was a mechanism by
which the parties agreed to act reasonably and in good faith, that is, with the joint
object of resolving any differences that may be identified, to determine the actual
cost to construct a store to Masters’ specifications so that Woolworths could meet the
difference between that cost and the cost on which the lease amount had been based.
It is not a clause that permitted Woolworths to terminate the Agreement for Lease if
that cost exceeded some undisclosed budget on the part of Woolworths, or if issues
arose with respect to the development or if it decided to pursue other alternative
options.
244
In my view, it is clear, as is submitted by NES, that a reasonable person, in the
position of Woolworths, which had the object of identifying and resolving
differences in the calculation of the Landlord’s Works Costs in mind, but no other
object, would have, at a minimum:
(a)
Invited NES to attend and participate in the open book review process and
encourage its involvement, so that NES would be informed of any differences
identified during that process and be better able to resolve them;718
(b)
Informed NES of any differences it had identified in relation to the calculation
of the Landlord’s Works Costs and Masters’ contribution and of any other
expectations Woolworths’ may have had in relation to those costs;719
(c)
718
719
SC:KS
Communicated to NES the basis of any conclusion that the Landlords’ Works
Transcript 1184–5.
Transcript 959–60, 1044–5.
169
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Costs or Masters’ contribution were “too high” or “unacceptable”,
particularly where the estimate provided was a detailed estimate from an
experienced builder whose estimates were known to be reliable from other
tenders;720
(d)
Assisted NES in identifying and obtaining quotes from alternative builders;721
(e)
Provided NES with any documentation, such as reports prepared by Rider
Hunt, that identified the differences and the basis of the differences
Woolworths had identified;722
(f)
Read, considered and communicated to NES the contents of the Rider Hunt
report of 22 April 2010, assuming Woolworths sought to rely on that report as
identifying any differences between it and NES in relation to the calculation
of the Landlord’s Works Costs and Masters’ contribution;723
(g)
If—as Woolworths submits but NES rejects—the open book process had not
been completed, adjourned or postponed the negotiations, if necessary, until
the open book process had been completed and any differences identified and
to enable all parties to consider any reports relied upon by the parties.724
I accept that only then could any constructive negotiation to resolve any differences
have taken place; a position which was admitted by Mr Macmillan.725 On any view,
on the evidence, Woolworths failed or refused to take any of these reasonable steps
before terminating the Agreement for Lease.
245
The only evidence of any attempt by Woolworths to negotiate the contribution
amount, as distinct from attempting to resolve differences in relation to that amount,
is a reference in the notes of Mr Graves of the 22 April 2010 meeting to the effect that
720
721
722
723
724
725
SC:KS
Such as the successful tenders for (Court Book 4795) Burnside, Coolaroo, (Court Book 4694) South
Morang, Dandenong and Keysborough.
Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [184]–[185], [220].
Transcript 717, 847, 915.
Transcript 717, 868–9.
Transcript 961, 1061–2.
Transcript 1191.
170
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Mr Macmillan said that Woolworths expected a contribution amount of around
$1 million.726 Mr Macmillan could not, however, recall whether he made such a
statement.727 If he did, this statement cannot have been an attempt to identify or
resolve “differences” Woolworths may have had in relation to the calculation of the
Landlord’s Works Costs, as contemplated by cl 2.2 of the Agreement for Lease, as the
$1 million amount bore no relationship to any differences that had been identified
with respect to the NES estimate of Landlord’s Works Costs. If Woolworths ever
had an expectation that the amount of the Masters contribution may be around
$1 million,728 any such expectation cannot have survived the detailed estimate
provided by Vaughan Constructions on 1 March 2010729 or the Rider Hunt estimate
of $2.94 million provided to Woolworths following the open book review process.730
Even the revised Rider Hunt estimate of $1.5 million provided to Mr Macmillan on
the morning prior to the 22 April 2010 meeting,731 which was not read or considered
by Woolworths or communicated to NES732 and which contained variations and
errors, far exceeded that amount. So, too, did the approved budget of $1.7 million
set in July 2010.733 Consequently, as the $1 million amount did not represent the
result of any genuine “difference” with the estimate provided by NES, any such
statement only reinforces the inference that Woolworths had no desire or intention at
that stage to resolve any real differences with NES in relation to the Masters
contribution. At best, the statement could have been a misunderstanding of what
cl 2.2(b) of the Agreement for Lease required, and the false assumption that
Woolworths was free to negotiate any contribution amount. At worst, it was a
deliberate attempt to create a disagreement that could be relied on to terminate the
Agreement for Lease. Moreover, it was not permissible for Woolworths to take into
account, in negotiating to resolve differences in relation to the NES estimate of the
Landlord’s Works Costs, the undisclosed budget set by the Property Committee on
726
727
728
729
730
731
732
733
SC:KS
Transcript 1069.
Transcript 868.
Transcript 693, 701.
Transcript 1069–70.
Court Book 3345.
Court Book 4236.
Transcript 1056.
Court Book 1212.
171
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
22 July 2009.734 That budget was set well before a design kit had been finalised, well
before the true cost differences between a Bunnings store and a Masters store were
known, well before the open book process to ascertain the actual cost of constructing
the Bendigo store had begun, and was set without any reference to the estimate
provided by NES.735
The differences that cl 2.2(b) of the Agreement for Lease
contemplated the parties would seek to resolve were differences in relation to the
calculations and assumptions on which the NES estimate of the Landlord’s Works
Costs were based, not differences between that estimate and an undisclosed budget
set without reference to the actual cost of constructing the Masters store.
246
Having rejected the NES estimate as being “too high” or “not acceptable”,
Woolworths then purported to rely on the lack of agreement of its own creation as a
basis for terminating the Agreement for Lease.
It did so, as discussed in the
preceding reasons, for a variety of reasons that had nothing to do with any inability
to resolve differences in relation to the calculation of the Landlord’s Works Costs by
NES, including opposition by the Council and a decision of the Property Committee
to pursue an alternative site. In my view, for these reasons, it is clear that not only
did Woolworths fail to act reasonably to resolve differences in relation to the
Landlord’s Works Costs, but it acted in bad faith by acting on matters which were
not contemplated by the Agreement for Lease. It is in this context, and only in this
context, that the contemporaneous Woolworths’ documents referring to the deal
being likely to “fall over”, well before negotiations had taken place, and the decision
to pursue an “alternative” site, as well as Mr Champion’s handwritten note and
Woolworths’ otherwise anomalous conduct leading up to the termination of the
Agreement for Lease make any sense.
It is not the conduct of a party acting
reasonably with the sole object of identifying and resolving differences in mind.
247
In conclusion, for the preceding reasons, I do find on the evidence that Woolworths,
in breach of cll 2.2(b) and (c) of the Agreement for Lease, did not act reasonably and
in good faith to resolve differences in relation to the estimate of the Landlord’s
734
735
SC:KS
Court Book 1212.
Transcript 1147–9.
172
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Works Costs by NES and terminated the Agreement for Lease for reasons that were
not permitted under the agreement.
248
In reaching this overall position, I emphasise that it has been reached—and in all its
aspects—as a result of primary reliance on contemporaneous documents. It is also a
conclusion—and, again, in all its aspects—reached on this basis and is not, as
Woolworths contends, the product of characterising the contentions of NES with
respect to any aspect of matters as, in effect, allegations of some conspiracy on the
part of Woolworths and various individuals.
Consequently, issues as to the
standard of proof of conspiracy or the reliance by NES on inferences do not arise.736
Loss and damage
Applicable principles
249
The principles applicable to the assessment of damages for breach of contract were
summarised by Jagot J in Haviv Holdings Pty Ltd v Howards Storage World Pty Ltd as
follows at:737
(1)
In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd,738 the High Court
said that the “ruling principle”, confirmed in this court on numerous
occasions, with respect to damages at common law for breach of
contract is that stated by Parke B in Robinson v Harman:739
The rule of the common law is, that where a party sustains a loss
by reason of a breach of contract, he is, so far as money can do it,
to be placed in the same situation, with respect to damages, as if
the contract had been performed.
(2)
The same principle has been stated as follows:740
The general principle governing the assessment of compensatory
damages in both contract and tort is that the plaintiff should
receive the monetary sum which, so far as money can, represents
fair and adequate compensation for the loss or injury sustained by
reason of the defendant's wrongful conduct. The application of
that general principle ordinarily involves a comparison,
sometimes implicit, between a hypothetical and an actual state of
affairs: what relevantly represents the position in which the
plaintiff would have been if the wrongful act (i.e. the repudiation
736
737
738
739
740
SC:KS
Cf Defendants’ Closing Submissions (3 September 2015) [261]–[291]. See also Transcript 1480.
(2009) 254 ALR 273 at 281–4 [27] (emphasis in original and citations omitted).
(2009) 236 CLR 272 at 285–6 [13].
(1848) 1 Ex 850 at 855.
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 116.
173
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
or breach of contract or the tort) had not occurred and what
relevantly represents the position in which the plaintiff is or will
be after the occurrence of the wrongful act.
(3)
The loss for which compensation is claimed must not be too remote.
The remoteness criterion is determined by reference to the so-called
rule in Hadley v Baxendale, according to which a loss caused by a
breach of contract is not too remote if it:741
may fairly and reasonably be considered either [as] arising
naturally, i.e. according to the usual course of things, from such
breach of contract itself, or such as may reasonably be supposed
to have been in the contemplation of the parties at the time they
made the contract, as the probable result of the breach of it
(4)
Further:742
An important matter in ascertaining whether the loss or damage
is too remote is the extent to which the parties may be taken to
have contemplated the events giving rise to that loss or damage.
The parties need not contemplate the degree or extent of the loss
or damage suffered. Nor need they contemplate the precise
details of the events giving rise to the loss. It is sufficient that they
contemplate the kind or type of loss or damage suffered.
741
742
743
744
745
SC:KS
(5)
Although damage is not an element of a cause of action for breach of
contract, “a plaintiff bears the onus of establishing the extent of his
loss or injury on the balance of probabilities. To satisfy the
requirements of that rule, a plaintiff must, if he is to recover more than
a nominal amount in such an action, affirmatively establish assessable
damage, that is to say, loss or injury which is capable of being
measured in monetary terms.”743
(6)
However, it “is irrelevant to inquire whether the defendants’ default
was the dominant, effective or real cause of the plaintiff's loss. If the
evidence is suggestive of multiple causation, the inquiry to be made is
whether the defendants’ default was a cause of the plaintiff’s loss. The
test of causation poses the question whether the plaintiff’s loss would
not have been suffered but for the defendants’ default. The question
is to be answered by applying that test in a practical common sense
way.”744 Hence, the “but for” test is not “the exclusive test of factual
causation.”745
(7)
Where an intervening event arises “the intervention will not have the
effect of terminating the defendants’ responsibility for the loss caused
by it, if the parties should have contemplated at the time of the
contract that in the event of the sort of breach which did occur an
intervention of that general kind was a serious possibility or a not
(1854) 9 Ex 341 at 342. See also Nick C Seddon, Rick A Bigwood and Manfred P Ellinghaus, Cheshire
& Fifoot Law of Contract (LexisNexis Butterworths, 10th ed, 2012) 1165–9 [23.39].
Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 365–6 (citations omitted).
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 118.
Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 315 [4]–[5] (emphasis in original
and citations omitted). See also at 350.
Chappel v Hart (1998) 195 CLR 232 at 243 [24].
174
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
unlikely occurrence.”746
(8)
It has also been said that, while the plaintiff has the onus of showing
loss caused by the breach, “if the loss in question is the apparent or
likely result of the breach, the onus shifts to the contract-breaker to
prove that it was not”.747 Further, in Henville v Walker McHugh J said
(albeit in a trade practices context) “[a]rguably, once a plaintiff
demonstrates that a breach of duty has occurred that is closely
followed by damage, a prima facie causal connection will be
established. It is then for the defendant to show that the plaintiff
should not recover damages. In the words of Dixon CJ in Watts v
Rake,748 it is the defendant who must disentangle, so far as possible,
the various contributing factors.”749
(9)
The rule that a “defendant is not liable in damages for not doing that
which he or she has not promised to do is necessarily subject to the
rule in Hadley v Baxendale.750 According to Alderson B’s renowned
formulation, the plaintiff is entitled to recover such damages as arise
naturally, that is, according to the usual course of things, from the
breach, or such as may reasonably be supposed to have been in the
contemplation of both parties at the time they made the contract as the
probable result of the breach.751”752 Hence, loss of the prospect of
securing a renewal of contract may be within the contemplation of
parties as probable result of breach.
(10)
Accordingly, as was stated in Malec v JC Hutton Pty Ltd per Deane,
Gaudron and McHugh JJ:753
When liability has been established and a common law court has
to assess damages, its approach to events that allegedly would
have occurred, but cannot now occur, or that allegedly might
occur, is different from its approach to events which allegedly
have occurred. A common law court determines on the balance
of probabilities whether an event has occurred. If the probability
of the event having occurred is greater than it not having
occurred, the occurrence of the event is treated as certain; if the
probability of it having occurred is less than it not having
occurred, it is treated as not having occurred. Hence, in respect of
events which have or have not occurred, damages are assessed on
an all or nothing approach. But in the case of an event which it is
alleged would or would not have occurred, or might or might not
yet occur, the approach of the court is different. The future may
746
747
748
749
750
751
752
753
SC:KS
Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 315 [11] citing Koufos v C
Czarkinow Ltd [1969] 1 AC 350.
Nick C Seddon, Rick A Bigwood and Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract
(LexisNexis Butterworths, 10th ed, 2012) 1159 [23.34] citing Reg Glass Pty Ltd v Rivers Locking Systems
Pty Ltd (1968) 120 CLR 516.
(1960) 108 CLR 158 at 160.
(2001) 206 CLR 459 at 507 [148].
Hadley v Baxendale (1854) 9 Ex 341.
Hadley v Baxendale (1854) 9 Ex 341 at 354.
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 91–2 (citations omitted). See also at 102–
3.
(1990) 169 CLR 638 at 642–3 (citations omitted). See also the reasons of Brennan and Dawson JJ at
639–40.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
be predicted and the hypothetical may be conjectured. But
questions as to the future or hypothetical effect of physical injury
or degeneration are not commonly susceptible of scientific
demonstration or proof. If the law is to take account of future or
hypothetical events in assessing damages, it can only do so in
terms of the degree of probability of those events occurring. The
probability may be very high—99.9 per cent—or very low —0.1
per cent. But unless the chance is so low as to be regarded as
speculative—say less than 1 per cent—or so high as to be
practically certain—say over 99 per cent—the court will take that
chance into account in assessing the damages. Where proof is
necessarily unattainable, it would be unfair to treat as certain a
prediction which has a 51 per cent probability of occurring, but to
ignore altogether a prediction which has a 49 per cent probability
of occurring. Thus, the court assesses the degree of probability
that an event would have occurred, or might occur, and adjusts
its award of damages to reflect the degree of probability. The
adjustment may increase or decrease the amount of damages
otherwise to be awarded. The approach is the same whether it is
alleged that the event would have occurred before or might occur
after the assessment of damages takes place.
(11)
The statement in Malec v JC Hutton Pty Ltd754 has been further
explained as follows:755
In Malec v JC Hutton Pty Ltd, this Court drew a distinction
between, on the one hand, proof of historical facts—what has
happened—and, on the other hand, proof of future possibilities
and past hypothetical situations. The civil standard of proof
applies to the first category but not to the second, particularly
when it is necessary to determine future possibilities and past
hypothetical situations for the purpose of assessing damages.
754
755
756
757
SC:KS
(12)
The general rule is that damages are assessed at the date of breach of
contract but “this rule is not universal” and “must give way in
particular cases to solutions best adapted to giving an injured plaintiff
that amount in damages which will most fairly compensate him for
the wrong he has suffered”.756 This is consistent with the approach
that rules which constitute “useful guidance in the ascertainment of
damages” should not be treated “as rigid rules of universal
application” incapable of being “displaced or modified whenever it is
necessary to do so in order to achieve a result which provides
reasonable compensation for a breach of contract without imposing a
liability upon the other party exceeding that which he could fairly be
regarded as having contemplated and been willing to accept.”757
(13)
The general rule that damages are usually assessed at the date of
breach of contract does not mean that events that have occurred after
(1990) 169 CLR 638.
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 350 (citations omitted).
Johnson v Perez (1988) 166 CLR 351 at 355–6.
Wenham v Ella (1972) 127 CLR 454 at 466. See also Commonwealth v Amann Aviation Pty Ltd (1991) 174
CLR 64 at 119.
176
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
that date may never be considered.758
(14)
250
Further, “[w]here there has been an actual loss of some sort, the
common law does not permit difficulties of estimating the loss in
money to defeat the only remedy it provided for breach of contract, an
award of damages.”759
The principles applicable where the case involves the loss of a commercial
opportunity were summarised by Hargrave J in Fenridge Pty Ltd v Retirement Care
Australia (Preston) Pty Ltd as follows:760
214
The legal principles to be applied in determining whether a loss of
commercial opportunity is compensable were stated by the High
Court in Sellars v Adelaide Petroleum NL.761 Mason CJ, Dawson, Toohey
and Gaudron JJ distinguished between proof of causation and proof of
damages, stating that proof of causation is to be determined on the
balance of probabilities as to whether a plaintiff has sustained some
loss or damage,762 and, if that hurdle is crossed, that the amount of
that loss or damage is to be ascertained by reference to the Court’s
assessment of the degree of probabilities or possibilities.763 These
conclusions were expressed in the following terms:764
[W]e consider that acceptance of the principle enunciated in Malec
v JC Hutton Pty Ltd requires that damages for deprivation of a
commercial opportunity, whether the deprivation occurred by
reason of breach of contract, tort or contravention of s 52(1),
should be ascertained by reference to the court’s assessment of the
prospects of success of that opportunity had it been pursued.765
The principle recognized in Malec was based on a consideration of
the peculiar difficulties associated with the proof and evaluation
of future possibilities and past hypothetical fact situations, as
contrasted with proof of historical facts. Once that is accepted,
there is no secure foundation for confining the principle to cases
of any particular kind.
On the other hand, the general standard of proof in civil actions
will ordinarily govern the issue of causation and the issue
whether the applicant has sustained loss or damage. Hence the
applicant must prove on the balance of probabilities that he or she
has sustained some loss or damage. However, in a case such as
the present, the applicant shows some loss or damage was
sustained by demonstrating that the contravening conduct caused
the loss of a commercial opportunity which had some value (not
758
759
760
761
762
763
764
765
SC:KS
Wenham v Ella (1972) 127 CLR 454 at 473.
Fink v Fink (1946) 74 CLR 127 at 143. See also New South Wales v Moss (2000) 54 NSWLR 536 at 554
[72].
[2013] VSC 464, [214]–[216]. See also Reading Entertainment Australia Pty Ltd v Burstone Victoria Pty Ltd
[2004] VSC 546, [461]–[462] (emphasis in original).
(1994) 179 CLR 332.
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355.
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355.
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355–6 (emphasis in original).
(1990) 169 CLR 638.
177
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
being a negligible value), the value being ascertained by reference
to the degree of probabilities or possibilities. It is no answer to
that way of viewing an applicant’s case to say that the commercial
opportunity was valueless on the balance of probabilities because
to say that is to value the commercial opportunity by reference to
a standard of proof which is inapplicable.
The conclusion which we have reached on this question finds
support in other considerations. The approach results in fair
compensation whereas the all or nothing outcome produced by
the civil standard of proof would result in the vast majority of
cases in over-compensation or under-compensation to an
applicant who has been deprived of a commercial opportunity.
Furthermore, it is an approach which conforms to the longstanding practice of taking into account contingencies in the
assessment of damages.
215
Brennan J delivered a separate judgment in Sellars v Adelaide Petroleum
NL.766 He summarised the principles in this way:767
Provided an opportunity offers a substantial, and not merely
speculative, prospect of acquiring a benefit that the plaintiff
sought to acquire or of avoiding a detriment that the plaintiff
sought to avoid, the opportunity can be held to be valuable. And,
if an opportunity is valuable, the loss of that opportunity is truly
“loss” or “damage” ...
However, a causal relationship between the loss of such an
opportunity and the defendant's contravening or tortious conduct
must be proved before any issue of the assessment of the amount
of the loss arises. ...
To prove the substantiality of a prospect of acquiring a benefit or
of avoiding a detriment and what would have been the plaintiff’s
actions if the opportunity had been offered, it will usually be
necessary to tender evidence to establish the plaintiff’s objectives
and the contingencies in the way of their achievement. Evidence
of that kind will bear upon both the existence and the value of the
lost opportunity.
216
These principles were summarised by Winneke P in Price Higgins &
Fidge v Drysdale, in the following terms:768
Where it is alleged that, as a result of negligent conduct, a plaintiff
has lost a valuable opportunity, the courts have required the
plaintiff to prove, in making good his or her claim, that the
negligence has caused the loss of an opportunity of “some” value
as distinct from “a negligible prospect”.
While the plaintiff is required to prove to the appropriate
standard of proof the existence of a valuable loss of opportunity
and the fact that it was caused by the defendant’s negligence, the
766
767
768
SC:KS
(1994) 179 CLR 332.
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 364–5 (emphasis added by Hargrave J in Fenridge
Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [215]).
[1996] 1 VR 346 at 354 (citations omitted).
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
plaintiff is not required to prove, on the balance of probabilities,
the value or extent of the loss because of the difficulties associated
with proof of past hypothetical fact situations; in those
circumstances the value or extent of the loss is to be ascertained
by reference to degrees of possibilities or probabilities. ...
Such principles appear to me to be well settled. But it is apparent
from their statement that the existence of the relevant loss, be it a
lost commercial opportunity or a prospective physical injury,
must be proven by evidence. It seems to me that one cannot
simply assume that a plaintiff has lost a valuable opportunity
because events supervening upon the defendant’s conduct might
suggest that such a loss has occurred. To prove that the loss has,
to the requisite standard, occurred and that it has been caused by
the defendant’s contravening conduct, the plaintiff is required to
demonstrate by evidence not only that the prospect had a real
value but also that, if the true position had been disclosed, he or
she would have acted to secure the benefit:769
To prove the substantiality of a prospect of acquiring a
benefit ... and what would have been the plaintiff’s actions if the
opportunity had been offered, it will usually be necessary to
tender evidence to establish the plaintiff’s objectives and the
contingencies in the way of their achievement. Evidence of
that kind will bear upon both the existence and the value of
the lost opportunity.
251
A number of cases were referred to by Woolworths in its submissions illustrating the
principles to which reference has been made:770
(a)
In Joyce v Bowman Law Ltd, the claimant recovered damages for the loss of a
chance to exercise an option to purchase, and redevelop, a residential
property. The court awarded an amount representing 29 per cent of the loss,
having applied discounts for the 85 per cent chance of otherwise possessing a
“watertight option”, 40 per cent chance of funding the development and 85
per cent chance of obtaining planning approval;771
(b)
In Jackson v Royal Bank of Scotland plc, the first instance judge, in assessing the
loss of chance to continue a supply agreement, calculated the loss of chance
by adding up, for each of the four years that his Honour found the agreement
would have continued, the chance that the supply agreement would have
769
770
771
SC:KS
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 365 (emphasis added by Hargrave J in Fenridge
Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [216]).
Defendants’ Closing Submissions (3 September 2015) [372].
[2010] PNLR 22.
179
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
continued (57 per cent, 46 per cent, 29 per cent and 16 per cent for each
successive year), and the likely profit for that year;772
(c)
In BestCare Foods Ltd v Origin Energy LPG Ltd, the court applied a discount of
45 per cent to reflect the uncertainty that a certain manufacturer would have
exercised options to purchase goods beyond the term of contract and
uncertainty about the volume of sales and the ability of the plaintiff to supply
the goods. That discount was applied to a present value of the likely profit,
reached by applying a discount rate of about 17 per cent;773
(d)
In Hart Security Australia Pty Ltd v Boucousis, the Supreme Court of New South
Wales observed, in obiter, with respect to the loss of an opportunity to enter
into a contract, that it would have been appropriate to apply discounts for the
possibility that the contract would not have been entered into, the plaintiff
failing to perform its obligations under the contract and “general economic
conditions and vicissitudes”, resulting in a 40 per cent reduction for the first
five-year term of the contract, and a 60 per cent discount for the contract
extension. These discounts were applied after the net present value of the
contracts had been determined;774 and
(e)
In Talisman Property Co (UK) Ltd v Norton Rose, the court applied discounts to
reflect the 70 per cent chance of obtaining against the defendant and a 40 per
cent chance of obtaining the judgment sum from the defendant's insurers, and
held that the claimant lost a 28 per cent chance.775
What was the opportunity lost by NES?
252
It is necessary, in considering the question of lost opportunity, to take as the critical
first step, the identification of the opportunity said to have been lost and to
determine whether, and if so, how, the plaintiff would have acted on that
772
773
774
775
SC:KS
[2005] 1 WLR 377.
[2013] NSWSC 1287.
(2014) 102 ACSR 557 at 600 [212], 601 [216].
[2006] EWCA Civ 1104.
180
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
opportunity. The identification of the opportunity that has been lost, including how
the injured party would have acted on that opportunity, may be critical in
determining what damages will most fairly compensate the injured party for the
wrong that it has suffered.776 Fairness is an issue to be considered with respect to
both parties in conducting this assessment. Thus, as Mason CJ said in Johnson v
Perez, damages in both tort and contract must be fixed so as to give an injured party
the amount in damages that will most fairly compensate that party for the wrong it
has suffered.777 This necessarily involves some balancing in the interests of fairness
to both the injured party and the party at fault.
253
Thus, in assessing loss and damage, the Court must “look at what actually
happened, and … balance the loss and gain”778 in order to obtain what is a “fair and
reasonable result”.779 In this vein, Hayne J said, in Unity Insurance Brokers Pty Ltd v
Rocco Pezzano Pty Ltd:780
Reasonableness informs much of the law of contract and, in particular, the
assessment of damages for breach. This means, for example, that if the party
wronged has acted reasonably, the wrongdoer may be liable for all the loss
that the plaintiff has suffered, even if the plaintiff’s conduct has increased the
loss. Conversely, the party wronged is not bound to take all possible steps to
mitigate its loss, only those steps which are reasonable.
254
It has also been well established that in determining what damages are necessary to
adequately
achieve
the
goal
of
accurate
compensation,
the
surrounding
circumstances, including the injured party’s intention, must be considered so as to
do justice between the parties.781 Mason CJ, in Johnson v Perez, addressed this aspect
in some detail:782
Take, for example, a shipload of petroleum destroyed en route to the harbour
where it was to be sold the next day. After the intended date of sale, oil
776
777
778
779
780
781
782
SC:KS
As to the principle that damages must be adapted to fairly compensate an injured party for the wrong
he has suffered see Johnson v Perez (1988) 166 CLR 351 at 355–6.
(1988) 166 CLR 351 at 355–60.
Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [335] quoting British
Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912]
AC 673 at 691.
Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [335].
(1998) 192 CLR 603 at 654 [134] (citations omitted).
Johnson v Perez (1988) 166 CLR 351 at 360.
Johnson v Perez (1988) 166 CLR 351 at 359–60.
181
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
prices rise. Because the object is to restore the injured party to the position he
would have been in save for the mishap, the court should not necessarily use
the date of judgment but rather should consider the use to which the
petroleum was to be put. It was to be sold immediately and the damages
should reflect the price the injured party would have obtained on the
intended date of sale.
This in fact is what the House of Lords did in Bwllfa and Merthyr Dare Steam
Collieries (1891) Ltd v Pontypridd Waterworks Co, a statutory compensation
case.783 A waterworks operator had been empowered by a statute to prevent
a landowner from working mines on his land if it would interfere with the
waterworks. The statute also provided that “full compensation” would be
paid in such instances to the landowner. After the issuance of the notice
inhibiting mining but within the time necessary to extract the coal, the price
of coal rose dramatically. The House of Lords held that the higher price was
the appropriate one in assessing the statutory compensation. The Earl of
Halsbury LC quoted with approval the words of Phillimore J below: “the true
inquiry here is not what is the value of the coalfield or the coal, but what
would the colliery company, if they had not been prohibited, have made out
of the coal during the time it would have taken them to get it.”784
Admittedly, where the injured party’s intentions are not so patent as in these
two examples, the determination of the time at which the injured good would
have been converted to currency may present a difficult task. In Hoefle v
Bongard & Co Rand J thought there was a conversion in breach of contract of a
bailment of shares by the stockbroker bailees.785 In ascertaining the
appropriate basis for the assessment of damages, his Lordship said:786
What [the bailor] would have done in the intervening time [between
the dates of breach and judgment], if the security had remained, is the
speculative basis from which the inferences must be drawn. We
cannot say that he would have sold at the highest or at the lowest
price or that he would have sold at all. But so far as the circumstances
permit, they are to be the ground of conclusions of probability.
As the cases to which I have referred reveal, the principles governing the
assessment of damages do not permit the application of rigid rules based on
categories of actions. Instead, the injured party’s intentions and the
surrounding circumstances must be considered in light of the underlying
principles in order to do justice between the parties. Where mitigation is
possible, an early date for assessment may be appropriate. Where mitigation
concerns are not relevant and the circumstances indicate that the injured
party would have maintained possession of the goods had the accident not
occurred, the date of judgment is the most appropriate date for assessment.
Where the circumstances indicate that the property or interest would in some
other way have been converted into monetary terms between the time of
injury and date of judgment, the date as at which the injury is assessed
should reflect the time of the intended conversion.
783
784
785
786
SC:KS
[1903] AC 426.
Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426 at 428.
[1945] 2 DLR 609.
Hoefle v Bongard & Co [1945] 2 DLR 609 at 620 (citations omitted).
182
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Mason CJ also made it clear that while these observations were made in the course of
considering the general rule for damages in tort, the principles apply equally in cases
of breach of contract.787
255
In the present case, NES submits that it has lost the opportunity to develop and lease
the Strathdale site to Masters pursuant to the terms of the Lease. NES emphasises
that it is that opportunity, and not the opportunity to develop and sell the site to a
purchaser at the date of completion of the development, that it has lost. Having
been deprived of the ability to develop and lease the Strathdale site to Masters, NES
submits that it has lost both the net present value of the stream of net rent it would
have earned under the Lease to Masters plus the net present value of the equity it
would have had in the Strathdale site as at the end of the lease. NES does, however,
accept that the loss should be discounted to its value as at the date of the breach and
must be reduced to account for the savings it has made by not having to develop or
maintain the site up to and during the period of the Lease.788
Would NES have acted on the opportunity had it been offered?
256
It follows from the compensatory nature of common law damages that damages for
loss of opportunity will only be recoverable if, notwithstanding the contravening
conduct, the applicant would have taken the opportunity.789
257
In the present circumstances, NES submits that it is open to the Court to find, and
that the Court should find, that had it been given the opportunity to develop the
Strathdale site into a Masters store and to lease the site to Masters pursuant to the
terms of the Agreement for Lease, it would have done so. Indeed, as NES observes,
it was legally bound to do so under the terms of the Agreement for Lease and the
Lease. Woolworths, on the other hand, contend that the evidence shows that there
was a real probability that NES could not have undertaken the development in any
787
788
789
SC:KS
Johnson v Perez (1988) 166 CLR 351 at 356.
It is well established that cognate with the compensatory principle, a plaintiff cannot recover more
than he or she has lost: Haines v Bendall (1991) 172 CLR 60 at 63; Fenridge Pty Ltd v Retirement Care
Australia (Preston) Pty Ltd [2013] VSC 464, [308].
Zoneff v Elcom Credit Union Ltd (1990) 94 ALR 445.
183
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
event, on the basis that it would not have obtained the necessary funding from
Bendigo Bank or the planning permissions necessary to proceed with the
development.
These are matters which are considered in further detail in the
reasons which follow.
258
Given the course of that consideration, as will be seen, I am of the view that the
evidence does not support the proposition that NES would not have obtained the
necessary funding from Bendigo Bank, nor that the planning permissions necessary
to proceed with the development of the Strathdale site as contemplated by the
parties would not have been obtained. Putting aside these particular matters for the
moment, I am of the view that it is clear NES did intend to develop the Strathdale
site and lease it to Masters, as is clear and self-evident from the terms of the
Agreement for Lease.
Moreover, Woolworths was well aware from its past
relationship with NES that NES was in the business of developing and holding
supermarkets and hardware stores, and operating and leasing these stores, but not
selling them. This is evident from the submission made to the Woolworths Property
Committee on 22 July 2009 seeking approval of the Strathdale development. The
submission stated:790
The subject site is owned by Brendan Blake, a property developer and owner
of a number of independent supermarkets. Brendan is developing the
proposed Woolworths supermarket at Kennington Village and he operates a
very successful independent supermarket at Castlemaine. He is also
developing the new Bunnings store at Ballarat.
259
For the reasons which follow, I do find that the opportunity NES lost, as a result of
the wrongful termination of the Agreement for Lease by Woolworths, was the
opportunity to develop and lease the Strathdale site to Masters for the duration of
the Lease and not the opportunity to develop and sell that site with the Lease in
place at the completion of the development.
I turn now to value this lost
opportunity in order to determine the quantum of damages that will fairly
compensate NES for the loss it has suffered according to the principles which have
been discussed.
790
SC:KS
Court Book 1207.
184
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Did the opportunity have some (not negligible) value?
260
As is clear from the preceding discussion, in order to establish a claim for loss of
opportunity, NES must prove that the wrongful termination by Woolworths caused
it to lose the opportunity to develop and lease the Strathdale site to Masters and that
this opportunity had some value, that value being calculated by reference to the
degree of probabilities or possibilities.791 As the decision of the Court of Appeal in
Reading Entertainment Australia Pty Ltd v Whitehorse Property Group Ltd indicates, the
correct time for these inquiries is the point at which the conduct causing the loss of
commercial opportunity occurred.792
261
Where the loss claimed by NES is the loss of opportunity to earn the rent promised
under the Lease and the capital appreciation of the land during the term of the
Lease—as is the present position—the Court must be satisfied, on the balance of
probabilities, that were it not for the conduct of Woolworths, NES would have had
an opportunity to obtain that benefit; that NES could, and would, have pursued that
opportunity; and that a benefit would have been yielded.793
262
For the preceding reasons, I am satisfied that but for the conduct of Woolworths,
NES would have had the opportunity to obtain this benefit and would have pursued
that opportunity. Thus, as NES submits, the only question is whether NES could
have pursued that opportunity such that the benefit would have been yielded. The
answer to this question necessarily involves the court assessing the prospects of
success of that opportunity had it been pursued. Thus, in Sellars v Adelaide Petroleum
NL (“Sellars”), Mason CJ, Dawson, Toohey and Gaudron JJ said:794
[T]he general standard of proof in civil actions will ordinarily govern the
issue of causation and the issue whether the applicant has sustained loss or
damage. Hence the applicant must prove on the balance of probabilities that
he or she has sustained some loss or damage. However, in a case such as the
present, the applicant shows some loss or damage was sustained by
demonstrating that the contravening conduct caused the loss of a commercial
opportunity which had some value (not being a negligible value), the value
being ascertained by reference to the degree of probabilities or possibilities. It
791
792
793
794
SC:KS
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.
[2007] VSCA 309, [26].
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 362.
(1994) 179 CLR 332 at 355 (emphasis in original).
185
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
is no answer to that way of viewing an applicant’s case to say that the
commercial opportunity was valueless on the balance of probabilities because
to say that is to value the commercial opportunity by reference to a standard
of proof which is inapplicable.
263
Woolworths contends, on the other hand, that the opportunity NES claims to have
lost could not have been pursued and therefore has no value. Woolworths say that
had they acted reasonably and in good faith:
(a)
agreement would not have been reached in relation to the calculation and
manner of payment of the Landlord’s Works Costs and Tenant’s contribution;
(b)
NES would not have been able to obtain funding to purchase and develop the
Bendigo site;
(c)
NES would not have obtained the necessary planning approval necessary to
develop the land (which included rezoning part of the land); and
(d)
the development could not have been completed in accordance with
Woolworths’ plans and specifications as a result of flood inundation issues
associated with the land.
For the reasons which follow, each of these contentions should, in my view, be
rejected.
Would agreement have been reached in relation to the Landlord’s Works Costs?
264
Woolworths contend that a “further Sellars discount would need to be applied to
reflect the fact that it is highly unlikely that an agreement in relation to the
[Landlord’s Works Costs] would in any event have been reached.”795 Woolworths
say that there was no evidence to suggest that they would ever have “acceded to Mr
Blake’s insistent request that the payment be made up front.”796 The parties were
unlikely, it is said, to reach agreement in relation to this important matter. Indeed, it
is said that the evidence in the proceeding, even now, shows that the parties still
cannot agree on the amount of the tenant’s contribution towards the Landlord’s
795
796
SC:KS
Defendants’ Closing Submissions (3 September 2015) [430].
Defendants’ Closing Submissions (3 September 2015) [430].
186
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Works Costs. This contention is, however, in my view, one of over-simplification
and over-generalisation, to say the least. Rather, the evidence of Mr McDonald was
that Rider Hunt had worked with Vaughan Constructions in relation to each Masters
store Vaughan Constructions had built. With the exception of the Strathdale site,
Rider Hunt’s negotiations with Vaughan Constructions on behalf of Woolworths
had always been satisfactorily concluded.797 Moreover, Mr McDonald said that, in
his opinion Rider Hunt and Vaughan Constructions had a good working
relationship and that, based on their track record, he considered it was likely that
they would have been able to reach agreement.798 Thus, the only real question is
what Landlord’s Works Costs and contribution amount would have been agreed?
265
The documentary evidence does demonstrate that by the conclusion of the open
book review process—at least as far as that process involved a line by line
comparison of costs between a generic Bunnings and a generic Masters store—Rider
Hunt and Vaughan Constructions had estimated that Masters’ contribution would
be $3,247,195.799 A subsequent review by Rider Hunt of the Vaughan Constructions
estimate, between 12 April 2010 and 18 April 2010, resulted in Rider Hunt and
Vaughan Constructions arriving at a Landlord’s Works Cost estimate of
$11,516,809.800 This equated to a Masters contribution of $2,941,169,801 as set out in
the revised NES contribution notice. No discussions took place between Rider Hunt
and Vaughan Constructions after this time. NES contends that it may therefore be
inferred because agreement had been reached and Rider Hunt’s comments
incorporated into the revised contribution notice.802
266
NES submits that as both estimates arrived at by Rider Hunt and Vaughan
Constructions equalled or exceeded the revised contribution amount sought by NES
797
798
799
800
801
802
SC:KS
Transcript 1273.
Transcript 1287.
Court Book 3293.
Court Book 3367, 3393.
The amount would have been $2,783,739 had the Vaughan Constructions estimate of the cost to
construct a Bunnings store been applied. For the reasons set out below the Troons estimate should be
preferred.
Mr McDonald’s oral evidence to the effect that Rider Hunt ceased working unless specifically asked
to continue should be rejected. If there were matters to be agreed, such as the items in the Rider Hunt
22 April 2010 letter, these would have been put to Vaughan Constructions. They were not.
187
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
of $2,941,169,803 it is open for the Court to find, and the Court should find, that had
Woolworths not been working to an undisclosed budget, they would have agreed to
pay the revised contribution amount. In light of all these circumstances, matters
which have been discussed in the preceding reasons, I am of the opinion that the
parties would have agreed to pay the revised contribution amount.
Moreover,
having regard to the terms of the Letter of Offer, particularly cl 13, and the
Agreement for Lease, it is, in my view, likely that in spite of disagreement between
the parties in this respect, the “contribution” would have been paid as a lump sum at
the completion of the Strathdale development. Had this not been the case, then NES
may have been required to borrow some or all of that amount to complete the
construction, in which case it would have incurred interest on these borrowings until
that contribution had been paid by Woolworths.
267
Finally, NES submits that if, contrary to its submissions, the Court finds that other
adjustments ought to have been agreed,804 Mr Blake’s evidence is that had he been
satisfied that the Landlord’s Works Costs was properly calculated, then NES would
have accepted the lesser contribution.805
Would Bendigo Bank have funded the development?
268
Obviously, without funding, the Strathdale development could not proceed and
however vehemently Mr Blake sought, through NES, to pursue the opportunity, it
would have been beyond reach and not a relevant consideration were the position to
be that the Bendigo Bank would not have funded the development.
269
The position of Woolworths in this respect is that as NES would have been funding
the development by loans from Bendigo Bank, the development would have been
unlikely to proceed because, it is said, it is evident that Bendigo Bank was extremely
keen for the Maxi Foods group to reduce its indebtedness and would have been
unlikely to consider new finance, especially where the relevant entity had little
803
804
805
SC:KS
Court Book 3345.
Such as the $123,497 for fit-out.
Outline of Brendan Edward Blake (6 March 2015) [232].
188
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
equity in the project.
270
In support of its submissions in this respect, Woolworths provides a summary of
contemporaneous documents which are said to be the best reflection of Bendigo
Bank’s position and speak to the serious risk that NES would not have obtained
funding for the development. The summary is as follows:806
Document
Detail
Credit memorandum dated
13 January 2010807
This credit memorandum was made in respect of
an application by the Blake … group for $450,000
of finance for the Kennington Village
development (an unrelated development in
Bendigo).
The financial figures set out in the memorandum
indicate that the group was extremely highly
leveraged and did not have the capacity to
accommodate more debt. Examples of this
include:
(a) the Group’s TAE/XTV ratio. This is the ratio
of total asset exposure against the total extended
value of security, which effectively measures the
total value of the securities that the bank holds as
against its debt exposure to the Group. The
group’s TAE/XTV was 141.64 per cent. well
outside of the bank's policy of 100 per cent;
(b) the Group’s sensitised debt cover in the
previous three periods were 1.25x, 1.19x and
0.63x. Sensitised debt cover is the amount by
which the income of the group exceeds the
interest repayments required to be paid to the
bank. Ordinarily it is expected that this figure is
in excess of 2.0x.
Recommendation from
Tony Bellizia, Senior
Manager, Group Credit
Bureau dated 5 February
2010808
In his recommendation to the Credit Committee
for this application Mr Bellizia, who was Mr
McGregor’s senior manager:
(a) imposed a series of stringent conditions on the
approval by the bank of any additional finance to
the group; and
(b) further downgraded the Blake Group’s credit
rating, from EQ5 (as proposed by Mr Blake’s
banking manager, Mr McGregor) to ES7,
reflecting concern from the bank’s perspective.
806
807
808
SC:KS
Defendants’ Closing Submissions (3 September 2015) [379].
Court Book 2590–606.
Court Book 2848.
189
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Document
Detail
Minutes of the Credit
Committee809
The Credit Committee confirmed and further
introduced stringent conditions on the provision
of finance to the group in 2010 which were
required to be satisfied before any additional
finance would be granted:
 Risk Grade to be amended to 7;
 Blake Group to be placed on Watch status and
Asset Management to [be] involved from a
monitoring perspective;
 Updated Valuations to be obtained within 60
days (noting condition precedent that written
instructions for the bank to instruct a panel
valuer to undertake revaluations);
 Registered Mortgage Debenture and
Interlocking Guarantee and Indemnity to be
taken from Maxi Group Holdings Pty Ltd;
 Investigation into ability of the ATO to set-off
any tax liability against the GST refund;
 2 year cashflow forecasts to be provided by the
group within 60 days;
 Direct charge to be taken over a liquor licence;
 A negative pledge/written confirmation that
the directors will not raise any further
liabilities, excluding the $6.4m Woolworths
debt, against Kennington Village Pty Ltd;
 Provision of an unconditional contract of sale
over Maxi Food Redan supermarket by no
later than 31 March 2010; and
 Provision of ATO integrated Client Statements
on a quarterly basis in line with quarterly
management accounts.
Placing the group on Watch status and involving
Asset Management is generally reserved only for
high risk clients.810
809
810
SC:KS
Court Book 5477–8.
See, eg, Transcript 350.
190
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
271
Document
Detail
Email chain from Graham
Hackett to Andrew
McGregor811
Graham Hackett states that “David & I have
discussed this and neither of us believe you will
get the Credit Committee support for this
transaction on a standalone basis. The issue is
that Blake has little equity in this transaction and
believe that the other items should be corrected
before we advance any further debt to this
group.”
MCC/BCC – Submission
Fate issued by Neil
Brunner812
A submission was approved but noted that “An
appropriately worded Formal letter is to be
issued to the customer highlighting the banks
continuing concerns over his group financial
position and our requirement that an additional
significant asset sale program needs to be agreed
to (in addition to the expected reduction to come
from the Horsham, Mansfield & Kennington
securities/property sales) before the bank will
agree to further facility extensions at our next
review in February 2012.” It went on to note that
if those conditions weren’t complied with, the
bank would put either Bunnings Ballarat or Mr
Blake’s family home in Toorak on the market
immediately.
Credit reporting memo
dated 12 December 2011813
“While the closure of Horsham and sale of the
Kennington Village property has resulted in a
significant improvement in the cash flow of the
group, as was noted by ECC, there remains [an]
unhealthy reliance on the trading performance of
the Castlemaine supermarket and the group still
has too many non income producing assets.”
The Minutes of the Woolworths Property Committee and the contemporaneous
notes of Mr Champion do reflect a belief—a mistaken belief contends NES—on the
part of Woolworths that NES had funding issues and would be unable to secure
funding for the development.814 As discussed previously, it seems likely that this
mistaken belief came about as a result of Mr Macmillan having been told that there
had been issues in relation to the Kennington Village development.815 As submitted
by NES, Mr Macmillan’s evidence to the effect that Mr Blake told him that NES had
811
812
813
814
815
SC:KS
Court Book 3861–3.
Court Book 3879.
Court Book 3881–2.
Court Book 3143.
Transcript 1173, 1177.
191
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
funding issues is not reflected in any contemporaneous documents passing between
Woolworths and NES.816 Moreover, Mr Blake’s evidence is that he had never said
NES had funding issues and that it would have been premature for NES to have
sought funding prior to planning approval having been obtained for the Strathdale
development.817
Having regard to the lack of contemporaneous documentary
evidence and Mr Blake’s evidence, I am of the view that the Court should find that
Mr Blake did not say that NES had funding issues.
272
Woolworths’ contentions in relation to its claim that NES had funding issues are on
the basis of a breach of covenant and various other Bendigo Bank documents that the
Bank had imposed strict conditions upon Mr Blake’s Maxi Foods Group which
would have prevented NES from obtaining funding from the Bank.818 Nevertheless,
the evidence of an employee and former employee of the Bank, Mr McGregor and
Mr Stockwell respectively, would indicate that this is not a correct understanding of
the Bank’s position with respect to Mr Blake and the Maxi Foods Group.
273
The evidence of Mr Stockwell was that an application by NES for funding from the
Bank would have fallen within the Bank’s lending parameters819 and would have
been regarded positively,820 particularly given the presence of a blue chip, long term
tenant such as Masters, a Woolworths company,821 and the Blake Group’s positive
record in relation to developments of this kind, including the development of a
Bunnings store in Ballarat.822 The evidence of Mr Stockwell is that the one breach of
a covenant by the Maxi Foods Group and the decision to walk away from the
Kennington Village development would have had no material impact upon the
ability of the Group or Mr Blake to borrow further funds. 823
exchange
816
817
818
819
820
821
822
823
SC:KS
expressing
concern
over
the
Kennington
Despite an email
Village
development,
Transcript 1176, 1177.
Transcript 207.
See Transcript 207. See also the documents to which Woolworths refers, as set out above at [270].
Transcript 435.
Outline of Evidence of Andrew McGregor (5 March 2015) [17].
Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [18]; Outline of Evidence of Andrew McGregor
(5 March 2015) [22]–[23].
Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [17].
Transcript 433; Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [23]–[25]; Outline of
Evidence of Andrew McGregor (5 March 2015) [26], [37], [61].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Mr Stockwell gave evidence that the Bank would still strongly consider advancing
funding to Mr Blake.824 At no time was the Group considered to be “a client that
was in distress or unable to qualify for credit from the Bank.”825 In fact, to the
contrary, Mr Stockwell considered that the Group had a good credit performance, a
good credit history and a stable credit rating.826
274
Woolworths, in its submissions, describes the evidence of both the Bank witnesses,
Mr McGregor and Mr Stockwell, as quite unsatisfactory.
275
In relation to Mr McGregor, Woolworths says that he was an advocate for his
customer; adding that to an extent, there is no criticism in this as his job was to
advocate for his client to obtain new credit. It is said that Mr McGregor did not seem
to be able to distance himself from this role in giving evidence and that this was
apparent generally from the prolix and argumentative answers given to simple
questions. An example given in support of this contention is the question asked of
Mr McGregor, namely whether, in considering new finance, for the Maxi Foods
Group, the Bank would consider the overall indebtedness of the Group. It is said by
Woolworths that Mr McGregor, having previously accepted the simple proposition
that in assessing the applicable risk grade for a customer, the Bank would consider
the overall indebtedness of the customer to the Bank and that, when asked if the
Bank would consider the overall indebtedness of the Group in considering new
finance, his answer was, as he said, more like a response to a “job interview”. 827 In
my view, however, such a characterisation of Mr McGregor’s evidence and the
manner and nature of his responses as applied by Woolworths is disingenuous and
not supportable both in terms of the transcribed text of his evidence and having
heard the witness and observed his demeanour. It is true that some of his answers
were lengthy and it is fair to say that he appeared to have a high regard for Mr Blake
and his Maxi Foods Group businesses, but, otherwise, Mr McGregor did, in my
view, seek to present a fair view of the Bank’s assessment of the Group and the
824
825
826
827
SC:KS
Transcript 437–8; Court Book 3861–3.
Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [11].
Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [13]–[14].
Transcript 361–4. See also Defendants’ Closing Submissions (3 September 2015) [381].
193
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
likelihood of its financing the Strathdale development.
276
Woolworths also contends that Mr McGregor was at pains to get across that, in his
view, if the transaction made sense on a standard loan basis and would improve the
overall position of the client, then the new finance ought to be approved.828
Moreover, it is said that Mr McGregor was reluctant to accept that the Bank’s Credit
Committee might take a different view.829 The basis for this submission is a question
and answer, as follows:830
The Credit Committee may take a different view, mightn’t they, Mr
McGregor?---No, I – not in my experience, no. I think Bendigo Bank - - -.
It was then put to Mr McGregor that the Bank was concerned about the overall
indebtedness of the Group, wanting the Group to reduce its debt and would be
unlikely to consider new finance until it did so, especially where the relevant entity
had little equity in the project. In any event, Mr McGregor maintained his position
and as an experienced and longstanding employee of the Bank, I am of the view that
his evidence should be accepted in spite of the view underlying the Woolworths
submissions that the Bank was unlikely to finance the project because of the level of
indebtedness of the Group. Woolworths’ position in this respect is, however, a
matter of inference and supposition which is not unequivocally established by the
documents to which Woolworths refers in its submissions and stands in the face of
evidence to the contrary by Mr McGregor and Mr Stockwell; witnesses who are
independent of NES though, of course, they had known and dealt with Mr Blake and
the Group over many years.
277
Woolworths then turns in its submissions to the detail of the Kennington Village
transaction:831
383.
In discussing the particulars of the Kennington Village transaction,
Mr McGregor:
(a)
828
829
830
831
SC:KS
volunteered, at length, his own summary of why he believed
Transcript 364.
Transcript 364.
Transcript 364.
Defendants’ Closing Submissions (3 September 2015) [383]–[384].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
the transaction would have been approved;832
384.
832
833
834
835
836
837
838
839
840
841
842
SC:KS
(b)
expressed his “very keen” desire for the Court to understand
why he recommended the loans;833 and
(c)
endeavoured to explain away why the bank had downgraded
[the] group's security position from D to E, on the basis that it
was just a change in interpretation in a policy, before accepting
that it was a change in the policy.834
However, Mr McGregor’s advocacy was perhaps most clearly
demonstrated in his approval of the outline of evidence filed on his
behalf. That is:
(a)
Mr McGregor was taken to the memorandum prepared by
Tony Bellizia, Senior Manager Group Credit Bureau, which
was attached to an email to Mr McGregor dated 5 February
2010.835 This memorandum was Mr Bellizia's comments on the
Credit Memorandum that was to be submitted to the Credit
Committee in respect of the Kennington Village loans;836
(b)
despite initially saying that he had not seen Mr Bellizia’s
memorandum before preparing his outline of evidence,837 Mr
McGregor also said that he had sent all of the bank documents
to NES’s solicitors with “specific instructions to make sure that
the documents I provided coincided with what was required
… so I had to go through document by document”;838
(c)
in his outline839 Mr McGregor actually quoted840 Mr Bellizia’s
summary conclusion that: “despite some negative aspects, the
writer believes that the group are well placed to turning things
around in the short term. We have supported the group to
date … and the group is worthy of our ongoing support”; 841
(d)
however, while being apparently happy to quote the
favourable summary referred to above, Mr McGregor did not
attach a copy of this memorandum to his outline and did not
refer to the much less favourable comments that Mr Bellizia
had added in bold at the end of the memorandum,842 which
had been added after Mr Bellizia had become aware of a tax
arrangement that the group had entered into. These comments
recommended a further downgrade of the security rating for
the group and the imposition of stringent conditions
Transcript 366–8.
Transcript 368.
Transcript 370–1.
Court Book 2848, 4803.
Dated 13 January 2010. See Outline of Evidence of Andrew McGregor (5 March 2015) [41], [58], which
refers to the Credit Memorandum as “BEN.2”: Court Book 2590–606.
Transcript 377.
Transcript 376.
Outline of Evidence of Andrew McGregor (5 March 2015) [41].
Albeit slightly inaccurately. See below [281].
Court Book 4806.
Court Book 4807.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
subsequent to the loan approval, aimed at reducing the
group’s debt; and
(e)
Mr McGregor said he didn’t include a reference to the “bold”
comments as the outline was his “witness statement in terms
of how I view the situation”843 and that he “didn’t think it was
necessary.”844
The reference in the submissions to the “bold” comments of Mr Bellizia are to
comments as follows:845
I have also provided the committee with a project security/servicing position
should we be asked to refinance the Woolworth debt in 6 months:
*PROPOSED
**SALE OF REDAN
GOODWILL
***REFINANCE
WOOLWORTHS
DEBT
TAE:
$36,686
$30,846
$37296
XTV:
$25,616
$31,811
$36,946
Market
Value
$51,755
$51,755
$59,655
TAE/XTV
Ratio:
141.2%
95.5%
97.5%
LVR:
91.5%
58.6%
61.6%
Project DSC
1.10x
1.31x
1.15x
-
-
-
* Projected DSC includes the proposed Woolworths exposure of $6.4mil @ 9
per cent
** Assumes Mortgage of Lease is in place prior to or around the same time
Maxi Foods Redan sale settlement occurs, we only receive $5mil from the sale
proceeds and the GST loan of $790k will have been cleared
***Refinance Woolworths debt ($6.4mil) with the bank to take a first
mortgage over the property with the purchase price of $7.9mil utilized within
the above figures, albeit property will be revalued at the time
Projected serviceability remains tight therefore it is imperative the closure of
Horsham and sale of non income producing assets also be considered by the
group.
TONY BELLIZIA
SENIOR MANAGER, GROUP CREDIT BUREAU
DISCLOSURE BY THE BBM AFTER MY RECOMMENDATION HAD BEEN
LODGED OF A TAX ARRANGEMENT OF $400K ($25K PER MONTH UNTIL
2011) THE FOLLOWING CHANGES WILL NOW BE RECOMMENDED:
843
844
845
SC:KS
Transcript 387.
Transcript 388.
Court Book 4807 (emphasis in original).
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-
RISK GRADE ES7 TO NOW APPLY
CONDITIONS SUBSEQUENT TO NOW INCLUDE:
PROVISION OF AN UNCONDITIONAL CONTRACT OF SALE
FOR MAXI FOOD REDAN BY NO LATER THAN 31 MARCH
2010 WITH FULL SALE PROCEEDS TO BE PLACED TOWARDS
PERMANENT DEBT REDUCTION OF THE BANKS FACILITY
PROVISION OF AN EXECUTED MORTGAGE OF LEASE OVER
IGA CASTLEMAINE BU NO LATER THAN 30 APRIL 2010
PROVISION OF ATO INTEGRATED CLIENT STATEMENTS ON
A QUARTERLY BASIS
Nevertheless, there is no evidence that the Bank took any particular action with
respect to these “bold” comments or that Mr McGregor was incorrect in his
assessment that the Maxi Foods Group and Mr Blake would be supported by the
Bank in the future.
278
Woolworths observe in their submissions that Mr Stockwell is no longer employed
by the Bank and adds that it might be suggested that he had no reason to advocate in
favour of Mr Blake. However, it is submitted that, apart from any sense of lingering
loyalty that Mr Stockwell might feel towards Mr Blake, it was apparent that
Mr Stockwell had “painted himself into a corner with the opinions he had expressed
in his outline of evidence, which had been prepared based solely upon his memory
and impressions of the group over a large number of years and without the benefit
of reviewing any of the contemporaneous documents” to which Woolworths
refers.846
Moreover, Woolworths submit that Mr Stockwell was unwilling to
consider the significance of these contemporaneous documents with an open mind
and moved beyond the generally favourable recollections he had of dealings with
the Group.
It is said that “[h]is evidence was, in effect, a reflection of the
unsatisfactory way his outline had been prepared.”847 The point is emphasised by
submissions that Mr Stockwell’s evidence was starkly at odds with the
contemporaneous documents.848 Moreover, it is submitted that Mr Stockwell’s view
that the Bank’s sense of loyalty to its client would ultimately override the numerous
concerns expressed in the documents849 is, it is said, simply not consistent with
846
847
848
849
SC:KS
Defendants’ Closing Submissions (3 September 2015) [389]. See Transcript 430–2.
Defendants’ Closing Submissions (3 September 2015) [389].
Transcript 426–8, 433.
Transcript 434–5, 443.
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contemporaneous internal communications.
In relation to the latter, particular
reference is made to the email exchange between Mr McGregor and Mr Hackett850
which, Woolworths contends, represented the position of the Bank at that time (in
September 2010) as well as in February 2010,851 and that the principal focus of the
Bank throughout the relevant period was in seeking debt reduction.852
279
Again, in my view, these submissions merit the same response to the similar
submissions made with respect to the evidence of Mr McGregor. The submissions
by Woolworths are based upon its inferences and assertions on the basis of various
bank documents, but they are inferences and assertions which fly in the face of the
evidence of long-term and experienced employees of the Bank. Moreover, these
witnesses are independent of Mr Blake and the Maxi Foods Group, and to say that
their evidence should be, in effect, disregarded on the basis that their dealings with
Mr Blake and the Group would have produced some overriding loyalty which
would have tainted their evidence and objectivity is disingenuous and, in my view,
must be rejected.
280
Nevertheless, as Woolworths contend, the Bank was concerned to reduce the
indebtedness of Mr Blake and the Group, as is clear from the documents to which
reference is made and the evidence that at one stage the Bank had considered
requiring Mr Blake to sell his private home in Toorak to reduce debt.853
281
In spite of the submissions by Woolworths with respect to the Bank’s desire for debt
reduction and problems that occurred with respect to the Kennington Village
Development,854 the position remains that in spite of the “bold” comments in
Mr Bellizia’s memorandum, the conclusion in the 13 January 2010 credit
memorandum as per the responses dated 5 February 2010 was, as set out above with
850
851
852
853
854
SC:KS
Court Book 3861–3.
Transcript 439–41.
Transcript 444.
Court Book 3879. See Transcript 446–7. See also Defendants’ Closing Submissions (3 September 2015)
[390]–[392].
See especially Defendants’ Closing Submissions (3 September 2015) [386]–[388].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
reference to Mr McGregor’s outline:855
Despite some negative aspects the writer believes that the Group are well
positioned to turning things around in the short to medium term. We have
supported the group to date and in the overall scheme the request represents
a permanent increase of 1.3 per cent to the current exposure and is worthy of
our ongoing support.
282
By early 2010, the Maxi Foods Group had taken tangible steps to improve its
financial position856 and, rather than being concerned about the increase in debt, an
application for funding for the Strathdale development would have been supported
by the Bank as part of a long-term strategy of diversification into long-term
investments.857
Mr Stockwell gave evidence that in relation to a client such as
Mr Blake, who had strong assets and a strong business, involvement in a
diversification project would have been in line with what the Bank wanted and
would in fact have helped the Bank feel more comfortable in advancing further
money to the Maxi Foods Group.858
Mr Stockwell’s evidence was that any
application by NES would have progressed to the Credit Committee, with negligible
chance that it would have been dismissed before that stage.859 Moreover, it was the
evidence of Mr Stockwell that the Credit Committee would have supported the
Strathdale development.860 Mr Blake was, Mr Stockwell said, regarded as one of the
most valued customers in the Bank’s head office business centre, and a customer
whom the Credit Committee wished to keep supporting.861 As such, Mr Stockwell
said it would have taken something “quite extraordinary” for the Bank to have
refused to finance the proposed development.862 More specifically, Mr Stockwell
gave evidence that if he had been presented with an application by NES for a loan of
approximately $17 million to fund the purchase of the Strathdale site land and
construct the proposed development, he would have supported the application and
recommended that the loan be approved, as would, he believed, the Credit
855
856
857
858
859
860
861
862
SC:KS
Court Book 4806. See above [277].
Outline of Evidence of Andrew McGregor (5 March 2015) [39]–[40].
Transcript 426.
Transcript 443.
Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [21].
Transcript 443.
Transcript 443–4.
Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [31].
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Committee863 and other banking institutions including Bank West.864
283
For the preceding reasons, as submitted by NES, it is open to the Court to find, and
the Court should find, on the basis of the evidence of Mr Stockwell and
Mr McGregor, that an application for funding to the Bendigo Bank was highly likely
to have been granted and that funding of the Strathdale development would not
have prevented the development of the Strathdale site by NES or have precluded
NES from leasing that site to Masters.
Would flood inundation issues have prevented the development?
284
It is common ground that the Strathdale site was subject to two environmental
overlays.
The first was an Environmental Significance Overlay—Schedule 1
(Watercourse Protection) (“the Environmental Significance Overlay”), and the
second, a Land Subject to Inundation Overlay (“the Inundation Overlay”). These
overlays required that any development on the Strathdale site must have regard to
the sensitivities of the adjoining watercourse, minimise flood damage and allow for
the free passage and temporary storage of flood waters.865 The inclusion of the
Strathdale site within a land subject to inundation overlay required that any
application for development be referred to the relevant flood plain management
authority pursuant to cll 44.04–5 and 66 of the City of Greater Bendigo Planning
Scheme.
The relevant flood plain management authority is the North Central
Catchment Management Authority (“NCCMA”).866
The question is, therefore,
whether the requirements of these overlays could be met in such a way as to allow
the Strathdale development to proceed.
285
NES was aware of the Inundation Overlay from at least 12 June 2008. 867 Further
information from the NCCMA in relation to flood impacts on the Strathdale site was
sought by NES on 25 February 2009. On 27 February 2009, the NCCMA advised
863
864
865
866
867
SC:KS
Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [21]; Transcript 434–6.
Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [36].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [40].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [95].
Court Book 781.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
that—868
in the event of a 100 year ARI flood it is unlikely that the existing dwelling
would be affected by flooding. It is possible though that a significant portion
in the north-east of the property adjacent to the Racecourse Creek may be
subject to inundation …
The NCCMA recommended that a licensed surveyor be engaged to determine the
exact effect of the applicable flood level on the property.
286
On 18 May 2012, the NCCMA responded that before it could give formal consent to
the development on the site, plans outlining how the following minimum conditions
would be achieved would be required to be submitted for approval:869
287
1.
Any new development must be set back a minimum of 30 metres from
Racecourse Creek, in accordance with Clause 14.02–1 of the State
Planning Policy Framework of the Greater Bendigo Planning Scheme.
2.
New development adjacent to the waterway must exhibit an
appropriate waterway interface i.e. new lots should not have rear
boundaries adjacent to the waterway reserve.
3.
All new allotments must be filled to at least the declared 1 per cent
AEP flood level(s).
4.
The finished floor level of any future dwellings must be constructed a
minimum of 300mm above the declared flood level.
The evidence is that Woolworths’ Site Selection Criteria required that the site not be
prone to flooding.870 Woolworths did, nevertheless, approve the development of the
Strathdale Site in spite of the apparent flood risk.871 NES submits that the Court
should infer that Woolworths believed that any inundation issues that affected the
site could be managed. For the reasons which follow, I am of the view that this is a
reasonable inference and one to which reference should be made and, particularly,
as the evidence does, in my view, establish that any inundation issues that affected
the site could in fact be managed satisfactorily.
288
Despite having approved the site and despite not having raised any concerns with
868
Court Book 945–6.
Court Book 3887.
Court Book 4562.
Court Book 1231.
869
870
871
SC:KS
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NES with respect to flooding or inundation issues while the Agreement for Lease
was on foot, Woolworths did, in May 2012, seek to obtain further advice from the
NCCMA in relation to whether flood inundation issues would preclude the
development.
The advice was sought by Mr Milinkovic of Urban Design &
Management, and was provided by the NCCMA on 18 May 2012. This advice was,
of course, provided well after the Agreement for Lease had been terminated by
Woolworths and at the time when the present dispute was, NES contends, within
the contemplation of Woolworths. NES also observes that no person from Urban
Design & Management or the NCCMA was called by Woolworths to give evidence
in the proceeding. More particularly, NES objects to Woolworths relying on the
letter of 18 May 2012 from the NCCMA as evidence of its contents or as proof of the
position that the NCCMA may have taken to any application by NES for planning
approval. Woolworths has chosen not to put into evidence the letter and proposal to
which the 18 May 2012 letter from the NCCMA responded or to call either the
NCCMA or the author of the proposal to which the letter responded. In any event,
the letter, on its face, appears to relate to a proposed multi lot residential subdivision
and not a large box home improvement centre with a large car-park area.
289
Having regard to the matters raised by NES in support of its objection to the receipt
of the 18 May 2012 NCCMA letter into evidence as evidence of its contents or as
proof of the position that the NCCMA may have taken to any application by NES for
planning approval, its apparent reference to a multi lot residential subdivision and
the lack of critically important contextual evidence, namely, the letter from
Woolworths requesting this advice, I am of the view that the objection is made out.
Consequently, the evidentiary value of the 18 May 2012 letter from the NCCMA is
no more than that appropriate flood mitigation measures would be required,
depending upon the nature of the development contemplated on the Strathdale site
and in conformity with the State Planning Policy Framework of the Greater Bendigo
Planning Scheme (“the State Planning Objectives”).
Importantly, in the present
circumstances, the letter is not, in my view, evidence of any issue with respect to
flooding which was seen as imposing an obstacle to the proposed Strathdale site
SC:KS
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development. This position is reinforced by other evidence and matters to which I
now turn.
290
Woolworths contend that the condition that any development must be set back a
minimum of 30 metres from the nearby watercourse, Racecourse Creek, in
accordance with cl 14.02–1 of the State Planning Objectives would have precluded
NES from constructing the store on the Strathdale site without changes to the design
of the store, which changes Woolworths said would not have been approved. In any
event, Mr Macmillan admitted in cross-examination that planning and flooding
issues were characteristic of a number of sites Woolworths was involved in and that
these were simply issues to be worked through by the landlord. 872 In any event, in
my view, it is not necessary to decide this issue as, for the reasons which follow, the
evidence supports a finding that the store could have been constructed on the
Strathdale site without the need for any such modification. In any event, I accept
that even if this were not the case, it is, as NES submits, open to the Court to infer,
and that the Court should infer, that had Woolworths acted reasonably and in good
faith and with the contractual object of progressing the development in mind, they
would have agreed to any changes to the design that were reasonably necessary to
mitigate the flood inundation issues.
291
The only expert called by the parties to address the question of whether the
Strathdale development could be constructed in a way that would mitigate any
impact on the adjoining watercourse, minimise flood damage and allow for the free
passage and temporary storage of flood waters was Mr Chris Thomas of
WorleyParsons. Mr Thomas’ evidence was that proximity to a watercourse does not
usually preclude developments of this kind.873
In his second expert report,
Mr Thomas provided examples of a number of big box hardware stores and
warehouse distribution centres that had been constructed in locations near
watercourses or in areas prone to inundation or flooding.874
872
873
874
SC:KS
Transcript 646.
Expert Report of Chris Thomas (8 May 2015) 12.
Expert Report of Chris Thomas (8 May 2015). See also Transcript 522–3.
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292
Although Mr Thomas’ evidence was that the proposed development could not be
constructed in accordance with the Catchment Planning and Management objectives
set out in the State Planning Objectives,875 his evidence is that a setback of 30 metres
was “excessive” and that a lesser setback could have been negotiated.876
Mr Thomas’ evidence was that the costs of implementing a solution that would meet
the requirements of the planning scheme would not have been prohibitive to the
development of the site.877 Mr Thomas’ evidence was also that setbacks are not
imposed solely having regard to hydrological considerations.878
In this respect,
Mr Thomas noted that: “In my opinion, the imposition of a strict 30 metre setback
from Racecourse Creek is not relevant to potential flooding issues arising from the
proposed development.”879
Setback requirements, he said, also offer benefits in
relation to inundation risks and water quality by filtering sediment and pollution
from the runoff from developed areas before it enters a natural creek.880 Again, this
evidence is, in my view, supportive of the position that meeting the requirements of
the planning scheme with respect to flood inundation issues would not have been
prohibitive to the development of the site. For these and the reasons which follow,
the submissions by Woolworths that the store could not, relevantly, have been built
as designed must be rejected.881
293
The evidence of Mr Biacsi, the planning expert called by NES, was that the 30 metre
setback referred to in the NCCMA letter was not a requirement that must be met in
order for the site to be developed. It was Mr Biacsi’s opinion that cl 14.02–1 of the
State Planning Objectives applied as a guideline and not as a statutory requirement
mandating strict or absolute compliance.882
It is, as Woolworths submit, “quite
apparent” to Mr Biacsi that flooding would have been an issue of concern to the
advisory committee in assessing any planning application in respect of the
875
876
877
878
879
880
881
882
SC:KS
Expert Report of Chris Thomas (8 May 2015) 9.
Expert Report of Chris Thomas (8 May 2015) 7.
Expert Report of Chris Thomas (8 May 2015) 7.
Expert Report of Chris Thomas (8 May 2015) 7.
Expert Report of Chris Thomas (8 May 2015) 13.
Expert Report of Chris Thomas (8 May 2015) 7.
Cf Defendants’ Closing Submissions (3 September 2015) [418]–[420].
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [74].
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Strathdale site.883 In this respect Mr Biacsi noted:884
The suitability of the site and potential flooding and water quality impacts
are matters about which the Advisory Committee would have been keenly
interested and needed to be convinced.
294
Mr Biacsi noted that, in his experience, inundation risks can raise a number of other
considerations of relevance to the planning process, including maintaining stream
habitats, large trees, native grass and wildlife corridors, and preventing the erosion
of stream banks.885 Additionally, Woolworths submit that it is important to note that
the proposed development was inconsistent with the condition of the State Planning
Objectives requiring that any development be set back 30 metres from Racecourse
Creek,886 which provides:887
Retain natural drainage corridors with vegetated buffer zones at least 30m
wide along each side of a natural waterway to maintain the natural drainage
function, stream habitat and wildlife corridors and landscape values, to
minimise erosion of stream banks and verges and to reduce polluted surface
runoff from adjacent land uses.
Nevertheless, as both Mr Biacsi and Mr Thomas said in their evidence, development
within 30 metres of the waterway may be permitted on a case-by-case basis, said
Mr Biacsi,888 and that a lesser setback could have been negotiated, said
Mr Thomas.889
Again, this is consistent with the evidence of Mr McGurn, the
Woolworths planning expert, who acknowledged that while the Inundation Overlay
posed challenges to the development of the site “these physical constraints could
potentially be overcome”.890 Mr McGurn’s evidence was to the effect that he could
not say “with any certainty” whether an acceptable layout could be achieved, given
the lack of resolved plans.891 It is contended by Woolworths that this should lead to
883
884
885
886
887
888
889
890
891
SC:KS
Transcript 560. See also Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015)
[56].
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [72].
Transcript 560–1. See also Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April
2015) [56].
Expert Report of Chris Thomas (8 May 2015) 7, 9.
Expert Report of Chris Thomas (8 May 2015) 7.
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [75].
Expert Report of Chris Thomas (8 May 2015) 7.
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [103].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [103].
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the view that the proposition that physical constraints could potentially be overcome
is of little assistance to the Court. In my view, the position is quite the contrary. The
lack of resolved plans, together with the evidence from the various experts whose
evidence has been referred to in the preceding reasons that flood inundation issues
are most likely able to be overcome, and the “fluid”—no pun intended—nature of
the development negotiation and planning process at this time would tend to
suggest even greater potential for overcoming flood inundation problems,
particularly where all parties concerned act reasonably and in good faith and with
the contractual object of progressing the development in mind.
295
Woolworths, in their submissions, also raise a number of other issues said to be
relevant to the assessment of the alleged loss of NES on the basis of the evidence of
these experts:892
412.
This raises several questions that are relevant to the assessment of
NES’ alleged loss:
(a)
would a permit have issued which permitted the store to be
constructed within the 30m setback? (If not, the development
could not have proceeded);
(b)
if development within the 30m setback was permitted, what
measures would need to be taken to:
(c)
413.
892
893
SC:KS
(i)
address the risk of the store (and carparks) being
inundated during flood events;
(ii)
to implement any mitigation strategies required to
address potential impacts downstream or to adjacent
properties; and
what would the costs of such measures be? (noting that
associated costs would be outside the scope of the [Landlord’s
Work’s Costs], and therefore fall entirely on NES).
As to the first question, Mr Biacsi was unable to offer an opinion on
what, if any, conditions would have been imposed on the
development as a result of the proximity to Racecourse Creek to the
site.893 In Mr McGurn's opinion, it is likely that the conditions set out
in the NCCMA's letter … including the 30m set back requirement,
would form part of any planning permit that may have been issued
Defendants’ Closing Submissions (3 September 2015) [412]–[417].
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [78].
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for the site.894 This opinion was not challenged in cross-examination.
414.
In relation to the risk of inundation, NES’s inundation expert, Mr
Thomas, gave evidence that the development would encroach on the 1
in 100 year ARI flood level, rendering it likely that part of the
development footprint would be inundated during a 100 year ARI
flood if constructed at current elevations.895
415.
Mr Thomas warned that this may result in damage to the structure
and contents of the building.896 He also gave evidence of the dangers
that a 100 year flood event could pose if persons entered flood waters
on the site,897 and the risk that vehicles parked on the northern
boundary of the site may float during flooding events (of depths at or
greater than 30cm), causing damages to structure, blocking flow paths
and heightening the risk of injury to persons.898
416.
Mr Thomas was unable to offer an opinion on the relevance of
ecological considerations to the Strathdale site.899 He also did not
inspect the site, instead relying on photos and Google street view
imagery.900 (It is not clear whether the images he has relied on were
taken during dry or non-dry periods.) Despite this, Mr Thomas was
able to form the opinion that some form of setback would be
necessary to meet the State Planning Objectives.901
417.
These matters demonstrate that the risks arising from the flood zone
and set back would have been of considerable concern to the Council
and, if addressed in a planning approval, would have been addressed
subject to conditions.
In my view, these matters do not take this particular aspect of the matter any further
and, moreover, do not provide evidence upon which it ought properly be concluded
that it was not more likely than not that the proposed Strathdale development would
proceed in spite of the inundation issues which have been discussed.
296
Finally, there is the evidence of Mr Troon, from Troons, which has constructed more
than 40 big box hardware stores for Bunnings, in relation to the NCCMA conditions.
Mr Troon’s evidence is that:902
The conditions in the development approval for the Masters store are
conditions quite often applied to developments such as this.
894
895
896
897
898
899
900
901
902
SC:KS
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [105].
Expert Report of Chris Thomas (8 May 2015) 3.
Expert Report of Chris Thomas (8 May 2015) 3.
Expert Report of Chris Thomas (8 May 2015) 3.
Expert Report of Chris Thomas (8 May 2015) 3.
Transcript 533.
Expert Report of Chris Thomas (8 May 2015) 2.
Expert Report of Chris Thomas (8 May 2015) 7.
Transcript 504; Expert Report of Steven Craig Troon (14 April 2015) [4.11].
207
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
We regularly engineer situations to comply with these conditions.
The application of these conditions has never resulted in our projects
becoming unviable.
Catering for 100 [year] rain events is a common condition for a [development
approval].
297
Mr Troon also gave evidence as to how these conditions could be accommodated
and estimated that the cost to comply with the conditions would be around
$350,000.903 No builder or engineer was called by Woolworths to give evidence that
the store could not have been developed as a result of the Inundation Overlay.
Indeed,
such
evidence
would
have
directly
contradicted
Woolworths’
representations to the State Government that the site was “shovel ready” subject
only to planning approval.904
298
Having regard to the preceding reasons and the evidence to which reference has
been made, it is, in my view, as NES submits, open to the Court to find, and the
Court should find, that, just as proximity to flood prone areas had not precluded the
development of other big box hardware stores,905 the proximity of the Strathdale site
to Racecourse Creek would not have precluded the site from being developed in
accordance with the Plans and Specifications.
Moreover, to the extent that
engineering solutions were required to mitigate any flood-related issues, these
solutions could have been incorporated into the construction at a total cost of less
than $350,000.906
Would the requisite planning approvals have been obtained?
299
The development of the Strathdale site could not proceed unless it was rezoned
under the Greater Bendigo Planning Scheme (“the Planning Scheme”), as part of the
site was zoned residential. An application was made seeking to have the entire
Strathdale site rezoned as Business 1 to enable the development to occur. That
application was subsequently withdrawn after the Agreement for Lease was
903
904
905
906
SC:KS
Expert Report of Steven Craig Troon (14 April 2015) [4.11].
Court Book 2110.
Transcript 525.
Expert Report of Steven Craig Troon (14 April 2015) [4.11].
208
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
terminated.
If the application had not been withdrawn, it would have been
considered by an advisory committee which had been appointed by the Minister
under s 151 of the Planning and Environment Act 1987 for the purpose of considering
a number of proposed Masters stores across Victoria.
300
Woolworths sought, in its submissions, to rely particularly on the evidence of the
NES planning expert, Mr Andrew Biacsi, in support of the position that obtaining
the necessary planning permission for the Strathdale site development would have
been doubtful to say the least:907
907
SC:KS
397.
NES’s planning expert, Mr Andrew Biacsi and the Defendants’
planning expert, Mr Stuart McGurn, agreed that it is not possible, on
the basis of information currently available, to predict with certainty
how the advisory committee may have regarded any applications
lodged in relation to the Strathdale site. Mr Biacsi, for example,
indicated that he could not form a concluded view on this issue
without having regard to a range of expert reports (including
economic analysis, traffic and access reports, urban design reports,
environmental impact reports, flooding and water management
reports), which were never prepared for the Strathdale site.
398.
It was apparent from the evidence given by the experts (for both
parties) that there was a real risk the advisory committee would not
have recommend granting the rezoning and planning approvals
necessary to undertake the development.
399.
The fact that the development did not have the support of the …
Council would have weighed against the rezoning application. The
advisory committee’s determination in relation to the proposed North
Geelong Masters store (in relation to which Mr Biacsi had acted for the
Defendants in respect of the rezoning application) is instructive in this
regard. The proposed North Geelong store was the only proposed
Masters site that was put to the advisory committee that was not
approved. It was also the only proposed site that did not have council
support.
400.
Mr Biacsi suggested in his report that there might have been economic
arguments in favour of the Strathdale development which could have
counterbalanced or outweighed the opposition by the City of Greater
Bendigo in the mind of the advisory committee. However, during
cross examination he accepted that the committee did not recommend
granting the rezoning sought for the North Geelong site, despite
recognising the North Geelong proposal offered real economic
benefits.
401.
Another factor that would have weighed against the required
Defendants’ Closing Submissions (3 September 2015) [397]–[402] (citations omitted).
209
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
approvals being granted is the fact that of the rezoning application
was outside the scheme framework. Mr Biacsi noted that this added
an element of uncertainty. According to Mr Biacsi, the fact that the
scheme discouraged allowing single use facilities to be located outside
of activity centres would have weighed against the likelihood of the
advisory committee recommending the application.
402.
Ten of the eleven proposed Masters sites that were put to the
Advisory Committee received approval. Of those 10, a majority were
in or at the edge of recognised activity centres, and the balance had
local council support. These are all, on this basis, distinguishable from
the Strathdale site, which did not satisfy either of those criteria.
While there must always be some risk associated with seeking permissions or
permits with respect to planning matters, the “doubtful prospects” picture as sought
to be painted by Woolworths is, in my view, far too bleak and, for the reasons which
follow, I am of the view that it was more likely than not that planning permission
would have been granted to allow the Strathdale development to proceed as
planned—or relevantly substantially as planned.
301
Woolworths Site Selection and Negotiation Criteria stated that sites would only be
selected if they were appropriately zoned or had “good prospects of rezoning”.908
That the Strathdale site was selected and approved does evidence that Woolworths
believed that the site had a good prospect of rezoning. Moreover, for the reasons
which follow, this appears to be a reasonable assessment on the part of Woolworths.
302
On 24 November 2009, the Council informed Woolworths and representatives of the
Department of Innovation, Industry and Regional Development (“DIIRD”), who
were assisting Woolworths with the Oxygen rollout, that, while the Council was
very supportive of having a Masters store in Bendigo, it had a number of concerns
with the store being located at the Strathdale site.909 Woolworths contends that the
position taken by the Council would have precluded NES from obtaining the
planning approvals necessary to develop the Strathdale site. Nevertheless, for the
reasons which follow, I do not accept that there is any basis for this contention.
303
Mr Champion’s evidence confirmed that Council support was not necessary in order
908
Court Book 4560.
Court Book 2105.
909
SC:KS
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
to obtain planning approval. According to Mr Champion, local councils were not
supportive of a Masters development in as many as 40 to 50 per cent of cases.910
Despite opposition from the relevant council, which Mr Champion acknowledged
Woolworths had experienced “many times in the past”, he admitted that “in many
instances [Woolworths had] succeeded in overcoming” [that opposition].911
Mr
Champion accepted that while Council opposition was of some concern, it was just
another issue that needed to be worked through.912 As observed by NES, no witness
gave evidence that Council opposition presented an insurmountable obstacle to
obtaining planning permissions.
304
Moreover, the evidence is that, far from being deterred by the position taken by the
Council,913 Woolworths sought the assistance of the Minister for Planning to “fast
track” the planning approval process for each of the key Oxygen stores across
Victoria, including the Strathdale site.914
This approach of seeking Ministerial
assistance was consistent with the Site Selection strategy which expressly
contemplated that Senior Management would lobby the State and Federal
authorities to obtain planning approval where appropriate.915 This decision to lobby
the Minister was also consistent with the recommendations that had been made by
the DIIRD916 and the planning advisers to Woolworths, namely, Urbis.917
305
In any event, on 22 February 2010, the Minister appointed an Advisory Committee,
pursuant to s 151 of the Planning and Environment Act 1987 to report on issues
concerning the proposed location of 12 Woolworths’ hardware concept stores,
including the store to be developed on the Strathdale site.918 The Terms of Reference
for the Advisory Committee stated that:919
The Minister for Planning considers that the proposed new stores are of State
910
911
912
913
914
915
916
917
918
919
SC:KS
Transcript 1198, 1119.
Transcript 1080.
Transcript 1080.
Court Book 2185.
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [36]; Transcript 641.
Court Book 4560.
Court Book 2185.
Transcript 942.
Court Book 2975.
Court Book 2929.
211
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
significance given their potential to deliver significant economic and
employment benefits, as well as greater retail choice to the Victorian
community by increasing retail competition in this sector.
The Terms of Reference for the Advisory Committee stated that the majority of the
sites identified by Woolworths required either a rezoning and, or alternatively, a
planning permit to allow construction of the proposed stores.
The Terms of
Reference stated that Woolworths would prepare draft planning scheme amendment
and planning permit documentation to be considered by the Advisory Committee.
Woolworths, together with the relevant councils, government authorities and
affected landowners, were then entitled to make submissions and to be heard by the
Advisory Committee. The Advisory Committee was to make recommendations to
the Minister in relation to the form and appropriateness of the proposed planning
scheme amendments and planning permit applications in a report. The report was
to be made within eight weeks of the completion of hearings.920
306
On 25 August 2010, following hearings into each of the proposed sites, the Advisory
Committee recommended the rezoning of ten of the eleven sites that had been
referred to the Committee by Woolworths.921 On 25 October 2010, the Minister
approved each of the stores that had been recommended.
The application for
planning approval for the Strathdale site was not considered by the Advisory
Committee, as it was withdrawn by Woolworths on 6 May 2010 following its
termination of the Agreement for Lease.922 Having withdrawn its application in
respect of the Strathdale site, NES submits that Woolworths now seeks to rely on the
uncertainty of its own creation in order to submit that NES can have suffered no loss
and damage as a result of Woolworths’ termination of the Agreement for Lease,
because the development would not have been approved or constructed.
This
submission, it is said, stands in stark contrast to the contemporaneous statements
made by Woolworths in relation to the risks associated with planning approval
having been obtained and the development being realised.
920
921
922
SC:KS
Court Book 2929.
Court Book 3505.
Court Book 3446.
212
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
307
In this vein, NES makes reference in its submissions to a letter to the Department of
Planning and Community Development which was sent at a time when Woolworths
had no direct financial incentive to overstate the risks associated with the project. In
that letter, Woolworths said:923
Our planning consultants, Urbis, have undertaken a detailed review of the
relevant planning and economic considerations applicable to each of the
above sites and consider that each site is consistent with the key planning
directions Policy, including Melbourne 2030, Melbourne @ 5Million and the
key directions Retail Policy Review.
As per our original request, it is now Woolworths intention to formally seek
assistance from the State Government to provide support for a coordinated
and expedient planning approval process to facilitate and “fast track” all
necessary planning approvals for the above first “block” of development
sites.
308
On 14 August 2009, Urbis prepared an advice to Woolworths in relation to obtaining
planning approval for the Strathdale site.924 In that advice, Urbis noted that an out
of centre development would be considered where it could be demonstrated that the
development will be of net benefit to the community.925 Urbis also noted that while
the Strathdale site did not form part of an existing activity centre,926 the majority of
the site was zoned Business 1 and therefore anticipated this sort of development.
Thus, Urbis concluded that “while the quantum of retail floor space will need to be
justified by an economic analysis due to its out of centre location, we consider the
principle of the development of the Product on this site to be acceptable.”927 Urbis
stated that consent could be obtained from the floodplain management authority by
demonstrating that the development will allow the free passage of floodwaters and
will minimise flood damage.928 Urbis said that it was essential that any application
be supported by a robust economic analysis that confirms both the need for
additional restricted retail space and that its introduction will not detrimentally
impact nearby centres such as the Bendigo CBD.929 More detailed analysis was
923
924
925
926
927
928
929
SC:KS
Court Book 2110.
Court Book 1243.
Court Book 1243.
Court Book 1244.
Court Book 1244.
Court Book 1245.
Court Book 1245.
213
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
provided to Woolworths by Urbis in November 2009 in a report entitled “Oxygen—
Economic Issues Review”.930 The September 2009 Urbis report concluded that there
were not any particularly significant economic issues in relation to the site; the
sequential test of alternative locations recommended in the Retail Policy Review
appeared to be met, as did the strategic assessment of the proposal. Urbis concluded
that there were no other appropriate sites in centre, it was highly unlikely there were
appropriate sites in an edge of centre location, the proposed site was appropriate for
this type of development, the site provided access to a sufficient catchment, there
was a need for the development, the development would not impact on the
established Activity Centre Hierarchy and that the proposed development would
improve and not adversely impact the availability of goods and services.
309
Despite Urbis having been engaged by Woolworths to prepare the draft planning
documentation for the Advisory Committee and having advised Woolworths in
relation to the likelihood of the planning amendments being recommended by the
Advisory Committee in relation to the Bendigo site, and despite Woolworths having
relied on the “detailed review” prepared by Urbis of the relevant planning and
economic considerations applicable to the Strathdale site in submissions to the State
Government at the time, Woolworths elected not to call Urbis to give evidence in
this proceeding. Thus, NES submits, it must be assumed that—applying the rule in
Jones v Dunkel931—any such evidence would not have assisted in its case and would
have at least supported the views set out in its report 932 and Woolworths’ own
contemporaneous documents.933 Instead, Woolworths seeks to rely on the expert
evidence of Mr McGurn, whose principal conclusion is that “a lack of detailed
analysis and expert reports supporting the proposal ... has the effect of creating
uncertainty with respect of the likely success (or otherwise) of any application being
supported by the ‘Project Oxygen’ Advisory Committee.”934
The evidence of
Mr McGurn included evidence that he was instructed that, as a consequence of
930
931
932
933
934
SC:KS
Court Book 5749.
(1959) 101 CLR 298.
Court Book 5749.
Court Book 2110–1.
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [9].
214
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Masters giving written notice to terminate the Agreement for Lease on 6 May 2010,
Woolworths advised the Advisory Committee that it no longer intended to proceed
with the proposed development of the Strathdale site. As a result, comprehensive
plans, reports and analyses normally required to assess such a proposal were not
prepared.
310
Given the unavailability of more detailed information, Mr McGurn relies on what he
describes as preliminary reports and site planning undertaken by Urbis and Pitney
Bowes for Woolworths in 2009. While both the Urbis and Pitney Bowes reports
support the rezoning of the Strathdale site, Mr McGurn states in his report that:935
[W]hilst it is claimed in the Urbis report that the sequential test was likely to
be satisfied there is no detailed analysis underpinning this opinion. Indeed a
number of detailed reports would have been required to be prepared, such as
economic analysis, traffic and access, urban design and environmental
impacts to support any proposal.
311
Despite being limited by the information provided to him, Mr McGurn nevertheless
concludes in his report that:
(a)
The (residential) zoning of part of the Bendigo site appeared to be an anomaly
that created uncertainty in relation to the use and development of the land;936
(b)
While the site was not within an established activity centre,937 there were a
number of locational factors that can be considered positive attributes for the
intended use of the site;938
(c)
In the four out-of-centre locations supported, the Advisory Committee was
satisfied that the sequential test could be achieved as well as the overarching
matters set out in Mr McGurn’s report;939
(d)
935
936
937
938
939
SC:KS
The Urbis report concluded that the proposal would likely have passed the
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [141].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [77]–[80]; Statement of Town
Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [64]; Transcript 565.
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [85]–[86].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [93].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [123].
215
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
sequential test;940
(e)
On the basis of the analysis prepared by Urbis and Pitney Bowes in economic
terms the proposal may well have been successful and would not have
compromised the role and viability of other stores and centres;941
(f)
The Project Oxygen rollout program was considered to be of State
Significance but this did not mean the proposals would have been supported
“at any cost”;942 and
(g)
While “there was no certainty” that the Advisory Committee would have
supported the proposal,943 there would have been some obvious locational
advantages of the site and some support for the proposal in relation to the
economic and competition benefits.944
312
It appears, however, that the only material obstacles to obtaining planning approval
identified by Mr McGurn, who did not disagree with the conclusions reached by
Urbis or Pitney Bowes, were that the site was not located within an established
activity centre,945 which concern is addressed by the application of the sequential
test, Council’s concerns about adjacent residents946 which Mr McGurn admitted was
not determinative, and what can only be inadmissible speculation about limitations
that may or may not have been imposed by the NCCMA as a result of the
Inundation Overlay.947 NES also emphasises that these conclusions are based solely
on the contents of the NCCMA letter of 18 May 2012, to which it objects,948 and other
documents said to be inadmissible, including an email of 24 October 2012 and a plan
from Urban Design and Management which are also objected to.
313
On the other hand, the evidence of Mr Biacsi, the planning expert called by NES, is
940
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [137].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [137]–[139].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [143].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [145].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [144].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [85]–[86].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [88]–[92].
Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [95]–[104].
See above [286]–[289].
941
942
943
944
945
946
947
948
SC:KS
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
that:
(a)
There would have been a good case for supporting the rezoning of the subject
land to facilitate an Oxygen store on the site;949
(b)
The proximity of a nearby residential development was not a constraint upon
the rezoning of the land;950
(c)
The likelihood of rezoning was supported by:
(i)
The
land
already
being
substantially
zoned
for
commercial
development with the majority of the land being zoned as Business 1;
(ii)
Despite the land being in an out-of-centre location, rezoning could
reasonably have been justified on “net community benefit” grounds
under the planning scheme;
(iii)
The land was proximate to the homemaker market and developing
areas of Greater Bendigo and enjoyed good access;
(iv)
The land is of approximate size and proportions to reasonably
accommodate the Oxygen store development;951
(d)
Had the application for rezoning been maintained and actively supported by
Woolworths it is likely that the Advisory Committee would have supported
the rezoning to facilitate the Oxygen store;952
(e)
Had the Advisory Committee recommended the rezoning, the Minister
would likely have acted on that recommendation;953
(f)
In the event that Woolworths had maintained its commitment to the rezoning
application and resourced it to the same extent it resourced other Oxygen
949
950
951
952
953
SC:KS
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [64].
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [65].
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [66].
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [68]; Transcript 563.
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [69].
217
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
store applications, and had the Advisory Committee supported the rezoning,
it is likely that the rezoning would have occurred;954
(g)
Any concerns raised by the Council would have been assessed in the context
of planning policy and the public interest.
The economic arguments
favouring the Oxygen program were persuasive and would have been a
significant factor in convincing the Advisory Committee of the acceptability
of rezoning;955 and
(h)
In order to determine what (if any) conditions may have been imposed by the
NCCMA as a result of the proximity of the land to Racecourse Creek it would
first be necessary to clarify the NCCMA’s position. The reference to a setback
of 30 metres per cl 14.02–1 of the State Planning Objectives would also need to
be clarified.
This clause identifies strategies intended to guide decision
making and must be read in the context of applicable planning controls. It is
a guideline and not a statutory requirement mandating strict or absolute
compliance.
The applicable planning controls contemplate circumstances
where development may be acceptable within this setback.956
I accept that, as submitted by NES, cross-examination of Mr Biacsi on whether it was
not possible to predict how the Advisory Committee would have acted “with any
certainty”957 can be of no assistance to the Court whose task it is to ascertain what
NES has lost by reference to degrees of possibilities or probabilities, not certainties.958
314
It is also submitted by NES that it is open to the Court to find, and the Court should
find, that had it not been for Woolworths’ breaches of cl 2.2 of the Agreement for
Lease which resulted in Woolworths withdrawing its application for planning
approval for the Strathdale site prematurely, Urbis would have completed its task of
preparing the draft planning scheme amendment in permit documentation and
954
955
956
957
958
SC:KS
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [84].
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [71].
Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [74]–[75].
Transcript 548.
Price Higgins & Fidge v Drysdale [1996] 1 VR 346 at 354.
218
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
submissions to the Advisory Committee. Those documents would, it is said, have
been consistent with the Urbis Report of November 2009, to which reference has
been made, and Woolworths’ letter to the State Government.959 The fact that the
preparation of these detailed reports was not completed is an issue of Woolworths’
own creation which was brought about by its own breach that has been further
exacerbated by its election not to call evidence from Urbis in this proceeding. As
submitted by NES, it is well established that a party cannot, either directly or
indirectly, benefit from its own wrongdoing960 or rely on any event brought about by
his or her own breach of contract.961 In New Zealand Shipping Co Ltd v Société des
Ateliers et Chantiers de France, Lord Chancellor Finlay described this principle as a
principle of law that ”no one can … take advantage of the existence of a state of
things which he himself produced.”962 This principle is not limited to cases in which
a party relies on its own wrongdoing to avoid a contract.963 Thus, having brought
about this state of affairs by their own breach of contract, it would be unjust to
permit Woolworths to rely on the absence of the reports that it had committed to
prepare in order to reduce the damages that would otherwise be payable to NES. To
do so would, in my view, be to permit Woolworths to benefit from their own
wrongdoing.
315
For the preceding reasons, on the basis of the evidence, it is open to the Court to
find, and the Court should find, that, had Woolworths acted in accordance with its
contractual obligations, planning approval would more likely than not have been
obtained for the Strathdale site; just as approval had been obtained for all but one of
the key Oxygen stores in other parts of Victoria.964
Would NES have realised the opportunity to develop and lease the Bendigo site?
316
Woolworths’ contention that any opportunity lost by NES was of no value as NES
959
Court Book 2110–1.
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 441.
Cheall v Association of Professional Executive Clerical and Computer Staff [1983] 2 AC 180 at 188–9.
[1919] AC 1 at 6.
Alghussein Establishment v Eton College [1988] 1 WLR 587.
Court Book 2110.
960
961
962
963
964
SC:KS
219
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
could not have developed the site should, for the preceding reasons and those which
follow, be rejected. Woolworths’ submissions to this effect do, in my view, overstate
the risks associated with the development of the Strathdale site. In this context, NES
submits that Woolworths’ submissions to this effect are a recent invention and for
the purpose of reducing Woolworths’ liability in this proceeding. For the reasons
which follow, I am of the view that these submissions are justified.
317
The present position contended for by Woolworths is in marked contrast to the
position taken in relation to the risks of development as stated by Woolworths in its
correspondence with the Department of Planning and Community Development,
namely:965
We are pleased to advise that Woolworths have now secured 13 development
sites … within Victoria for which we intend to lodge formal development
applications. …
We advise that each of these sites are “shovel ready” subject to planning
approval. … We also advise that the developers responsible for construction of
the above leasehold sites are also in a position to commence construction
immediately following planning approval.
318
In relation to the prospects for obtaining planning approval, Woolworths relied on
its advice from Urbis that the application in respect of each site was “consistent with
the key planning directions Policy, including Melbourne 2030, Melbourne @ 5Million
and the key directions Retail Policy Review.”966 On the material before the Court, it
does appear that the pessimistic view of the prospects for the development which
are now taken by Woolworths are self-serving and are not divorced from the
relationship, the direct relationship, between Woolworths’ liability for damages in
this proceeding and the risks of the development being completed.
319
For the preceding reasons, NES submits, in my view correctly, that it is open to the
Court to find, and that the Court should find, that but for the withdrawal of
Woolworths’ support for the development, the development would have proceeded
and the benefits promised under the Agreement for Lease would have been realised.
965
966
SC:KS
Court Book 2110 (Plaintiff’s emphasis).
Court Book 2110.
220
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Thus, I turn to the remaining question, what is the value of that lost opportunity?
Quantification of loss
If NES has lost a valuable opportunity, what was that opportunity worth?
320
The central and critical question in determining the quantum of loss and damage is
what amount of compensation is necessary to put the injured party in the same
position it would have been in had the breach of contract not taken place.967 Where
the loss is the loss of a commercial opportunity, the question becomes what is the
value of that commercial opportunity and what discount should be applied to reflect
the risks that the commercial opportunity may not have been realised. To this point,
the ground is common between the parties. Woolworths, however, contend that in
any event, NES has not lost any commercial opportunity of meaningful value. In
relation to the applicable methodology in the present circumstances, Woolworths
submit that, as a starting point, it is necessary to ascertain the value of the
commercial opportunity in the—as it says—highly unlikely event it would have
transpired. In this respect, Woolworths say that the evidence shows that NES would
have made a loss in undertaking the development.
321
Secondly, Woolworths submit that the evidence demonstrates that there was a high
probability that NES would have been unable to complete the development at all, as
it would have been unable to obtain the necessary finance and planning permits for
the development and for other reasons advanced in the Woolworths submissions
which have already been considered in these reasons. As indicated in the preceding
reasons, I do not accept that there was a high probability that NES would have been
unable to complete the development at all.
322
Thirdly, it is submitted that, in accordance with the principles set out in Sellars, a
significant discount needs to be applied to the determined value of the commercial
opportunity.968
967
968
SC:KS
See above [249]–[251].
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.
221
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Valuing the lost opportunity
323
As discussed previously, NES contends that the opportunity that it has lost is the
opportunity to realise the rental returns promised under the Lease to Masters, along
with the value of the Site at the conclusion of the Lease. Moreover, it says that NES
has saved, and must account for, the costs of completing the development and
maintaining the site for the duration of the Lease.
For the reasons indicated
previously, I accept that this is the proper characterisation of the opportunity lost,
thus the question becomes, how should that loss be valued?969 Clearly assessment of
value and associated risks almost 40 years into the future is difficult and carries a
degree of uncertainty.970 Nevertheless, this reality is, in my view, accommodated in
the methodology adopted.
Appropriate methodology for assessing value of lost opportunity
324
The experts called by the parties agreed as to the appropriate methodology to be
applied to assess the value of any commercial opportunities lost by NES.
The
evidence of the valuation expert called by NES, Mr Owain Stone, is that the
appropriate methodology to assess the value of the alleged lost opportunity to NES
is to compare the cash flows NES would have incurred or earned if the development
had gone ahead, with the actual cash flows it did incur (“actual versus but for
analysis”).971 Mr Stone expressly stated that this methodology is the appropriate
one, even though he understood that NES had no intention of selling the site upon
completion of the development.972
The alternative methodology relied upon by
NES, which is discussed in the reasons which follow, was put to, but Woolworths
submits not accepted by, Mr Stone as an appropriate methodology. Woolworths’
valuation expert, Ms Dawna Wright, agreed that the actual versus but for analysis
adopted by Mr Stone is the appropriate methodology,973 and criticised the
alternative methodology put forward by NES.974 Woolworths do, however, submit
969
970
971
972
973
974
SC:KS
See above [255].
Defendants’ Closing Submissions (3 September 2015) [318]–[328].
Expert Report of Owain Stone (1 May 2015) [35], [61].
Expert Report of Owain Stone (1 May 2015) [67].
Expert Report of Dawna Wright (13 May 2015) [2.1.3], [4.1]–[4.2].
Expert Report of Dawna Wright (13 May 2015) [2.2.4], [5.3.1]–[5.3.5].
222
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
that while Mr Stone applied the correct methodology, his assessment of the value of
the commercial opportunity is wrong as it relied upon a number of assumptions that
are inaccurate.975 However, for the preceding reasons, I am of the opinion that Mr
Stone’s assumptions are reasonable in the circumstances, particularly with respect to
the quantum and payment of the Landlord’s Works Costs.
325
In its particulars of loss dated 4 May 2015, NES asserted that the value of its loss
should be calculated by adding the net present values of:
(a)
the “loss of rental surplus”, being the net rental income NES would have
achieved during the term of the Lease (assuming all six options to renew were
exercised and the Lease ran for the maximum 42 years); and
(b)
the “capital loss” or “net equity”, being the capital value of the land less any
loan balance as at the conclusion of the Lease (assuming all options were
exercised and the Lease ran for the maximum 42 years).
(“the Alternative Methodology”).
326
Woolworths contends that there is no evidence to support adopting the Alternative
Methodology for assessing loss.
Assessing the future value of a property by
separately valuing the rental income expected to be earned in the intervening period
and the land as at a future date, that is, at 2052, is said not to be a normal approach
to property valuation. Moreover, it is submitted by Woolworths that in almost 30
years’ experience as a property valuer, Woolworths’ expert property valuer,
Mr Jackson, gave evidence that he had never heard of such an approach being
applied to a property such as the Strathdale site.976 Moreover, Woolworths contends
that it is telling that:
(a)
the Alternative Methodology was put to Mr Stone by a supplementary letter
of instruction issued on the same date that he provided his initial report;977
975
976
977
SC:KS
Defendants’ Closing Submissions (3 September 2015) [329]–[367].
Transcript 1250–1.
Expert Report of Owain Stone (1 May 2015) Appendix E.
223
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
and
(b)
while the Alternative Methodology was put to Mr Stone, he did not adopt
it.978
327
In accordance with his supplementary instructions, Mr Stone simply performed an
act of calculation by applying the basic formula put to him—Loss = NPV of A + NPV
of B—to inputs that he was instructed to assume. Woolworths say, however, that it
is clear that Mr Stone does not regard the sum he derived by applying the
Alternative Methodology to be reflective of the loss suffered by NES.979
Additionally, Woolworths submits that the Alternative Methodology is dangerous
and unreliable because, among other defects, it requires the Court to rely on
projections of income that will be earned over a long period and to rely on an
estimate of the value that a particular property will have over 40 years into the
future.
328
Finally, Woolworths observe that NES did not lead any evidence as to the value of
the property at the end of the Lease—that is, in 2052—or the appropriate risk rate to
apply in projecting the income that may be earned over a 42 year period.
Cash flow methodology
Comparison of cash flows
329
As has been observed, Mr Stone gave evidence that in his opinion, an appropriate
methodology for assessing the loss and damage suffered by NES was to determine
the difference between the cash flows which NES would have incurred had the
development gone ahead and the actual cash flows it did incur. Ms Wright agrees
with this approach,980 as does Mr Jackson.981 As set out below Mr Stone uses the
value of the completed development as a proxy for the cash flows the property could
978
979
980
981
SC:KS
Expert Report of Owain Stone (1 May 2015) [59]–[62].
Expert Report of Owain Stone (22 May 2015) [33]. See also Expert Report of Owain Stone (1 May 2015)
[67].
Expert Report of Dawna Wright (13 May 2015) [2.1.2].
Expert Report of Grant Jackson (15 May 2015) [33]–[44].
224
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
have achieved. To this he added Masters’ contribution amount as an estimate of the
total revenues the property would have generated.
330
Mr Stone derives this value by identifying the total cash flows that NES would have
earned had the development been completed and deducting the costs that NES has
saved by the development not proceeding.982
Valuing the cash flows that would have been achieved
331
It is the appropriate method of valuing the cash flows that NES would have earned
which is in dispute. Mr Stone estimates the value of the cash flows that NES would
have earned by two different methods. Question 6, which was put to Mr Stone in
the initial instruction letter dated 20 March 2015, asked:983
In your opinion what types of costs (excluding those that are in your opinion
minor) would have been incurred by NES in order to complete the
development and to lease the site to Woolworths (including the cost to
purchase the land, the Landlord’s Works Costs and the finance costs)?
In his answer to this question, Mr Stone estimates the value of the development on
the date of completion, applying the Discounted Cash Flow method, as a “proxy” for
the future cash flows the property may have generated.984 Question 9, as set out in
the additional letter of instructions dated 1 May 2015, asked:985
In your opinion, what net equity (being the difference between the capital
value of the land less any loan balance) would there have been in the Bendigo
Property as at the conclusion of the 42 year lease?
And in the same additional letter of instructions, Question 10 asked:986
What would the net present value of the answer to [Question 9] be at 6 May
2010 (applying the same discount rate as in answer to [Question 2] above to
reflect the time value of money)[?]
Mr Stone, in his answers to Questions 9 and 10, estimates the value of the cash flow
directly, using the Discounted Cash Flow method for the rent earned over the Lease
982
983
984
985
986
SC:KS
These costs included the cost of purchasing the land and constructing the development as well as
borrowing costs and stamp duty.
Expert Report of Owain Stone (1 May 2015) Appendix D [4.7].
Expert Report of Owain Stone (1 May 2015) [39], [67].
Expert Report of Owain Stone (1 May 2015) Appendix E [3.3].
Expert Report of Owain Stone (1 May 2015) Appendix E [3.4].
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JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
and the Capitalisation of Income method for the residual value of the property at the
end of the lease.987 In both cases, where Mr Stone uses the Capitalisation of Income
method he arrives at an “illustrative” value of the property by applying a notional
yield. In this respect, Mr Stone says in his report: “I understand that property values
are often derived by dividing rental value by an assumed yield.”988 The valuation is
illustrative as, while Mr Stone is an experienced business valuer, he is not a property
valuer and does not have the expertise to determine what yield should be applied.989
332
Similarly, Ms Wright is not a specialist property valuer and it is for this reason that
Mr Jackson and Mr Sutherland provide expert opinions as to the yields that may be
applied to the calculations performed by Mr Stone and Ms Wright. There is, in my
view, no difficulty with this approach as it is well accepted that the Court can accept
the evidence of one expert in relation to one issue, such as methodology, and the
evidence of another expert in relation to a separate issue, such as the applicable
yield;990 all the more where their expertise is complementary.
The Discounted Cash Flow method
333
Question 8 as set out in the additional letter of instructions to Mr Stone dated 1 May
2015 asked:991
What would the net present value of that stream of net revenue or surplus
rent have been as at 6 May 2010?
In performing this calculation, please apply a discount rate that you consider
to be reflective of the time value of money over this period.
In his answer to this question, Mr Stone values the stream of net rent that could have
been earned under the lease using the Discounted Cash Flow methodology. This
methodology, which is common, involves calculating the net present value of pre-tax
cash flows. Moreover, in addressing this question, Mr Stone says, with respect to tax
987
988
989
990
991
SC:KS
Expert Report of Owain Stone (1 May 2015) [43], [44].
Expert Report of Owain Stone (1 May 2015) [89].
Expert Report of Owain Stone (1 May 2015) [38].
Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 453.
Expert Report of Owain Stone (1 May 2015) Appendix E [3.3].
226
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
on lost cash flows:992
70.
It is necessary to consider whether the plaintiff would have paid tax
on the estimated Lost Cash Flow. In addition, consideration should be
given to the rate at which tax would have been paid, the availability of
any tax losses, and the timing of any tax payments.
71.
I have not been provided with any details relating to NES’s tax
position.
72.
If the Lost Cash Flows would have been subject to income tax then in
my opinion the loss and damage should be based on post-tax cash
flows since that is what the plaintiff has lost.
More particularly, Mr Stone answers Questions 7 and 8 as follows:993
92.
I have set out the surplus rent calculations that NES would have
achieved over the 42 year term of the Lease in Appendix C.
93.
The net present value of that stream of surplus rent as at 6 May 2010 is
$11.073 million.994
94.
In performing this calculation I have applied a discount rate reflective
only of the time value of money over this period. I have assumed this
rate to be 5.4 per cent per annum, based on the 10-year
Commonwealth Bond rate as at 6 May 2010.
Assumptions
95.
96.
992
993
994
SC:KS
In estimating the above figures I have made the following
assumptions based on instructions provided to me (these are in
addition to the assumptions set out at para 8):
a.
That NES would have incurred running costs of $32,000 per
annum; and
b.
That construction would have commenced around October
2010 and would have completed eight months later ie around
June 2011.
In estimating the above figures I have made the following
assumptions which are additional to the assumptions I have been
instructed to make:
a.
That the lease period would have commenced on 1 July 2011;
b.
That cash flows would have occurred on average half way
through each year;
Expert Report of Owain Stone (1 May 2015) [70]–[72].
Expert Report of Owain Stone (1 May 2015) [92]–[96].
This assumes the Masters contribution would have been received at the start of construction.
Assuming the contribution would have been received at the end of construction changes this figure to
$10.909 million.
227
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
c.
That the rental receipts would have been increased at actual
CPI995 up to June 2014 and 2.5%996 per annum thereafter.
d.
That NES would have incurred no other costs associated with
holding the property;
e.
That NES would not have used the surplus rent to reduce the
outstanding loan from Bendigo Bank; and
f.
That Bendigo Bank would have capitalised the interest on the
loan during the construction phase.997
Mr Stone calculates the end or exit value of the property at the end of the Lease—
when the land may be sold—using the Capitalisation of Income method based on the
rent that the property would have earned in the last year of the Lease and the yield
that applied on the date of his report.998 This assumes that the property would have
been properly maintained and could continue to have realised that level of rent.
Where the Lease required the property to be maintained and the rent was fixed to
the lesser of CPI or 4 per cent—which does not even preserve the real value of the
rent—NES submits that this assumption is not unrealistic.
334
Ms Wright values all cash flows from the property—both the future and rental
income and the end value of the property—using the Discounted Cash Flow
method, using the rent during the first year of the Lease and the yield applicable as
at the date of completion of the development.999
335
Moreover, NES makes reference in its submissions to material with respect to the
Discounted Cash Flow method by Lonergan in the text, The Valuation of Businesses,
Shares and Other Equity:1000
995
996
997
998
999
1000
SC:KS
Index: All groups CPI; Melbourne.
The RBA Statement on Monetary policy dated February 2015 states that the CPI forecast for the next
two years ranges from 1.25 per cent to 3.25 per cent.
I have made this assumption despite the fact that I had been instructed that the more likely scenario
would have been that NES would have paid interest during the construction phase. However, to
assume this would have meant that my calculation would have excluded this interest cost. It is, in my
opinion, irrelevant where the funding for the interest during the construction phase would have come
from, whether it would have been from the bank or funded by the Plaintiff. It is a cash flow of the
Plaintiff regardless of its source.
Expert Report of Owain Stone (1 May 2015) [43], [44].
Court Book 5515.
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 376
(Plaintiff’s emphasis).
228
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Returns from property comprise net income plus capital appreciation.
However certain types of property are purchased primarily for their potential
to increase in capital value (for example, land suitable for sub-division,
vacant CBD sites etc.) while others are purchased primarily for their annual net
income (for example, fully let shopping centres in fully developed areas). The
former are generally valued using the hypothetical development method of
valuation. The latter are valued as the present value of the expected future cash flow
from net rental income plus the expected end or exit value of the property at the end
of the period.
Thus it is said that the Hypothetical Development method to which reference is
made, which is a derivative of the Discounted Cash Flow methodology, which is
used to value property acquired with the intention of developing and then selling it,
involves deducting the costs of development from the estimated proceeds of sale as
at the date of completion. The proceeds of sale may be calculated by discounting the
expected cash flows or capitalising those cash flows to arrive at a value at
completion of the development.1001
The Capitalisation of Income method
336
The Capitalisation of Income method involves valuing the property by capitalising
the (pre-tax) net rental income the property produces at a capitalisation rate based
on the yield reflected in contemporaneous sales of comparable income producing
properties.1002 Lonergan comments in The Valuation of Businesses, Shares and Other
Equity, that the Capitalisation of Income method assumes a continuation of the rental
income at the date of the valuation.1003 For this reason NES submits this method is
not applicable for valuing the rent, which was not fixed under the Agreement for
Lease. The Capitalisation of Income method also assumes that the potential for
rental and capital growth risks associated with investing in the property and any tax
deductions available to an owner are all reflected in the yield. 1004
While it is
accepted that the yield1005 will implicitly incorporate some discount to reflect the
purchaser’s—or the market—perception of the risks associated with the cash flows
1001
1002
1003
1004
1005
SC:KS
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 378.
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 371.
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 371.
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 371.
Which is no more than the relationship between the rental return of a property and its purchase price
at the time of sale.
229
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
from the property being achieved, at the point of sale, it will also necessarily
incorporate other dynamics of the market (such as supply and demand, interest rates
etc.) at the time of sale.1006 It is for this reason that market yields change over time.
These market dynamics bear no relationship to the risks associated with achieving
the particular cash flows in question.1007
337
This is not to say that the Capitalisation of Income method has no application. On
the contrary, NES does accept that where the property is to be sold, or the cash flow
capitalised, at or near the time of valuation, at which point the dynamics of the
market will be highly relevant to the price achieved, the valuation of the property by
this method may be appropriate. It is for this reason that the method is appropriate
to value the property at the end of the Lease when it may realistically be sold. In
contrast, where the property is to be sold, and the income capitalised, at a much later
point in time, under different market conditions, the application of this method,
which assumes the risk of cash flows being achieved is reflected in the yield, which
yield is derived under different market conditions, may not be appropriate. It is for
this reason that NES does not accept the use of the Capitalisation of Income method
to value the cash flows of the property “at the date of completion of the
development”.1008 Another reason that the selection of a yield that is reflective of the
underlying risks of achieving the cash flows in question is that the Capitalisation of
Income method of valuation is extremely sensitive to the yield selected with a
percentage change in the yield having a disproportional effect on value.1009
338
The Capitalisation of Income method is also highly dependent on there being
sufficient sales of “truly comparable properties” at or around the valuation date to
allow an appropriate yield to be identified.1010 The evidence reveals that there had
1006
1007
1008
1009
1010
SC:KS
See Expert Report of Grant Sutherland (27 May 2015) [51].
It is for this reason that the same income producing property, attracting the same rent, can sell for
different amounts. See, eg, the Masters store at Williams Landing: Court Book 5530; Expert Report of
Grant Sutherland (27 May 2015) [53]).
Plaintiff’s Closing Submissions (3 September 2015) [463].
See, eg, Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed,
2003) 373 where a 1 per cent change in yield results in a 21 per cent increase in value. See also
Transcript 1237.
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 373.
230
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
been no sales of Masters stores at the time when Woolworths contend NES’s cash
flows should be valued.
There had been a small number of sales at the date
Mr Sutherland derives his yields for the purpose of Mr Stone’s end value estimate.
339
In applying the Capitalisation of Income method the yield to be applied is selected
based on observable market yields from the sale of comparable properties. The yield
is determined by dividing the price by the rental return.
340
Given the relationship between the market dynamics and yields, and the critical role
that yields play in this methodology, Lonergan, in The Valuation of Businesses, Shares
and Other Equity, states that in determining the yields property valuers should
consider the underlying supply and demand dynamics of the market including the
level of development activity.1011
341
In selecting the yields that Woolworths’ submit should be applied as at the date of
completion, Mr Jackson appears to have given no consideration to these matters
including the time at which the property was likely to be sold, the level of interest
rates, foreign investment or falling yields which are a significant contributing factor
to the yield selected, but may be entirely inapplicable when the property is
eventually sold and the equity in it realised. Mr Sutherland has taken those matters
into account in selecting an appropriate yield at the date of his report, as a proxy for
the yield that might apply at the end of the Lease.1012
The validity of the Discounted Cash Flow method for valuing the cash flows
342
In circumstances where NES purchased the Strathdale site for the purpose of earning
and retaining the annual net income from Masters, and did not intend to sell the site
during the life of the Lease, NES submits that the more appropriate method of
valuing its loss is to value the stream of net rent NES would have earned over the life
of the Lease—using the Discounted Cash Flow method which has been described—
and adding the net present value of the end value of the property using the
1011
1012
SC:KS
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003)
372–3.
Expert Report of Grant Sutherland (27 May 2015) [51].
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JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Capitalisation of Income method at the end of the Lease. This involves calculating
the present value of the expected future cash flow from the net rental income plus
the exit value of the property at the end of the Lease. This is consistent with valuing
the loss as the loss of the value of the Lease plus the loss of the residual value of the
land as an income producing property.
343
Mr Jackson accepted in cross-examination that valuing the net present value of
income under the lease and the exit value of the property was a valid alternative to
the Capitalisation of Income method.1013
Ms Wright also accepted in cross-
examination that valuing the stream of cash flows using the Discounted Cash Flow
method may be appropriate where the cash flows are known—as is the case here
with net rental.1014 In order to ensure that risks associated with achieving the cash
flows from the development were not double-counted, Mr Stone was asked to apply
a risk-free discount rate which reflects only the time value of money. Ms Wright also
accepted in cross-examination that the incorporation of the same risks into a
discount rate and Sellars discount may result in double counting of those risks.1015 It
follows that the risks would be double counted if the same risks are incorporated
into the discount rate applied under the Discounted Cash Flow method and then a
Sellars discount were to be applied by the Court.
344
NES accepts that where a risk free discount rate has been used (as is the case for
Mr Stone’s estimate of the value of net rent in answer to Questions 7 and 8 of his
report1016), a Sellars discount will be applied by the Court to reflect the risks of the
cash flows not being achieved.1017 Where the Capitalisation of Income method is
applied, a Sellars discount should apply to only those risks that preceded the
valuation date as all post-valuation risks are assumed to have been incorporated into
the market yield; assuming the properties from which the yield is derived are truly
compatible.
1013
1014
1015
1016
1017
SC:KS
Transcript 1251–2.
Transcript 1372.
Transcript 1394.
See above [333].
Transcript 1378.
232
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
The application of the Discounted Cash Flow method
345
On this basis, and in answer to Questions 7 to 11 of his instructions, Mr Stone
calculated the net present value—as at the date of breach—of the stream of surplus
rent NES would have earned under the Lease. The net present value of that stream
of revenue was estimated to be $11.073 million using a risk-free discount rate of
5.4 per cent being the 10 year Commonwealth Bond Rate.1018
Ms Wright gave
evidence that the 10 Year Bond Rate as at 6 May 2010 was 5.54 per cent,1019 which
was accepted by Mr Stone1020 and incorporated in the amended calculations
provided to the Court. According to Mr Stone’s amended calculations, using the
Discounted Cash Flow method, the net present value of the net rent over the life of
the Lease, as at the date of breach, was estimated to be $10,722,842.1021 Mr Stone then
calculated an illustrative net present value of the exit value of the property as at the
end of the Lease (using the Capitalisation of Income method). The estimate was
illustrative as it was based on an assumed yield.1022
346
When the yields identified by Mr Sutherland (of 6.5 per cent to 6.75 per cent) as at
the date of his report—being the date closest to when the property would
realistically have been sold—were incorporated into this calculation, along with the
rental return in the last year of the Lease, the net present value of the exit value of
the property at the end of the Lease was estimated to be between $3,705,216 and
$3,906,035.1023 This results in a net present value of stream of surplus rent and net
present value of the exit value of the land, using the Discounted Cash Flow method,
of between $14,428,058 and $14,628,876 or approximately $14.5 million.
347
NES submits that this estimate accurately reflects the true value of the lost
opportunity suffered by NES as a result of the wrongful termination of the
Agreement for Lease by Woolworths. It does follow, of course, that, being the loss of
an opportunity, an appropriate discount must be applied to this estimate of loss, in
1018
1019
1020
1021
1022
1023
SC:KS
Expert Report of Owain Stone (1 May 2015) [93].
Expert Report of Dawna Wright (13 May 2015) [2.2.2].
Expert Report of Owain Stone (22 May 2015) [28].
Court Book 5985.
Expert Report of Owain Stone (1 May 2015) [102], Appendix C.
Court Book 5985–6.
233
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
accordance with the principles in Sellars, to reflect the possibility that the outcome
may not have been achieved.1024 The appropriate discount to be applied to NES’s
risk-free loss of $14.5 million is considered in detail in the reasons which follow.
Valuing the cash flows together as at the date of completion
348
Question 1, which was put to Mr Stone in the initial letter of instructions dated
20 March 2015, asked:1025
In your opinion, what is the appropriate methodology to assess the loss and
damage suffered by NES as a result of the development not proceeding?
In answer to Question 1, Mr Stone estimates the value of the development on the
date of completion, applying the Capitalisation of Income method, as a “proxy” for
the future cash flows the property may have generated.1026 On the basis of an
assumed yield of 7 per cent Mr Stone then arrives at an illustrative estimate of NES’s
loss and damage1027 as at the date of termination of the Agreement for Lease.1028 Mr
Stone says he believes yields range between 6 per cent and 9 per cent, but that there
is no publicly available data in relation to yields on properties such as this one.1029
When Mr Sutherland’s yield of between 6.5 per cent and 6.75 per cent1030 is applied,
this method results in an estimate of NES’s loss and damage as between
$4,005,7011031 and $4,739,923.1032 That is, at least $4 million. NES submits that this is
the lowest measure of NES’s loss and damage open.
349
The principal reason that this method results in an estimate of loss and damage that
is materially lower that the Discounted Cash Flow method as discussed is that, by
applying a yield to all cash flows the Capitalisation of Income method heavily
discounts both the net rental return and the residual equity in the property to reflect
the market conditions and (it is assumed) the market’s perception of the risks of the
1024
1025
1026
1027
1028
1029
1030
1031
1032
SC:KS
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.
Expert Report of Owain Stone (1 May 2015) Appendix D [4.3].
Expert Report of Owain Stone (1 May 2015) [67].
Expert Report of Owain Stone (1 May 2015) [39].
Expert Report of Owain Stone (1 May 2015) [58].
Expert Report of Owain Stone (1 May 2015) [89]–[90].
Expert Report of Owain Stone (1 May 2015) [59].
Based on a yield of 6.75 per cent.
Based on a yield of 6.5 per cent.
234
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
cash flows not being achieved, as at the date of completion. This method would
apply where NES intended to sell the property as at the date of completion. By
comparison, the Discounted Cash Flow method leaves the Court to apply a Sellars
discount to the risks associated with NES achieving the net rent promised under the
Lease (a task NES says the Court is better placed to do than the “market” for
purchasers of Bunnings stores as at the completion date) and applies the discount
the market would apply to the residual value of the land (the yield) as at the date of
the proceeding which NES says is more reflective of the market into which it may
have sold.
350
If, however, the Capitalisation of Income method is applied and the cash flows
capitalised as at the date of completion, NES submits that any Sellars discount
should be limited as this method implicitly incorporates into the yield a discount for
risks associated with the underlying cash flows being achieved.1033 As such, any
Sellars discount should be limited to any pre-completion risks. However, for the
reasons which follow, I am of the view that the Capitalisation of Income method as
at the date of completion is not the most appropriate method of estimating NES’s
loss and damage in this case as it would not fully compensate NES for the
opportunity that it has lost.
Issues with valuing cash flows as at the date of completion
351
Although the Capitalisation of Income method is a common method—and a simple
method—of valuing income producing properties, it is not the only method nor is it
the most appropriate method in every circumstance. Thus, in Challenger Property
Asset Management Pty Ltd v Stonington City Council, I said:1034
It is clear from the authorities that, depending on the particular
circumstances, different methods of valuation may be appropriate. The
courts have not adopted a prescriptive position with respect to valuation
methodology and care should be taken to ensure that no single process of
reasoning is elevated into a statement of principle.
Consequently, in selecting and applying a valuation methodology careful
1033
1034
SC:KS
Expert Report of Owain Stone (1 May 2015) [67].
(2011) 34 VR 445 at 456–7 [24] (citations omitted).
235
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
consideration must be given to the reality of the marketplace including the
circumstances in which the property to be valued would have been sold.1035
352
In the present case, one fact that is critical to the valuation of NES’s lost opportunity,
is that NES did not intend to sell the Strathdale site upon completion but instead
intended to hold onto the Strathdale site for the duration of the Lease in order to
realise the full benefits of the rent payable by Masters under the Lease and any
capital appreciation over that time.1036 This fact is of particular significance given
that the market yields for investment properties have been decreasing over time.
The evidence of Mr Sutherland was that:1037
It is evident from a review of the sales evidence that capitalisation rates
[(yields)] have continued to decline due to the historically low interest rate
environment and as a result of the extremely competitive investment market,
including a strong involvement of offshore, largely Chinese purchasers.
Moreover, Mr Stone states in his report:1038
I understand that it was not the intention of the Plaintiff to sell this property.
However it is appropriate to use the illustrative value of the property at
completion as a proxy for the present value of all future cash flows which NES
would have incurred/earned after the completion of the development (other
than the repayment of the loan itself), risk adjusted for the time value of money
and the likely risks (as estimated by the market) regarding the future cash flows
likely to be enjoyed by the owner …
While Mr Stone is correct in stating that it may be appropriate to use the market
value of a property at a particular point in time as a “proxy” for the stream of
revenue—including from the ultimate sale of the land—that the property may
generate over time, this is not always so and careful consideration should be given to
the date of valuation.
353
NES submits that where the injured party intends to sell the property at or around the
date at which the value is assessed, so as to capitalise that income, or where the property
is to be held but the market yield1039 is stable, the Capitalisation of Income method
1035
1036
1037
1038
1039
SC:KS
Perpetual Trustee Co Ltd v Valuer General (No 2) (2007) 99 SASR 251 at 259–60 [20]–[22].
Transcript 217.
Expert Report of Grant Sutherland (27 May 2015) [51].
Expert Report of Owain Stone (1 May 2015) [67] (Plaintiff’s emphasis).
That is, the relationship between purchase price and rental return, which is assumed to incorporate an
236
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
may be appropriate. However, for the reasons set out below, where the injured
party intends to hold onto the property and the market yields are not stable, as is the
case here, the Capitalisation of Income method has the real potential to
undercompensate the injured party when yields are falling or overcompensate the
injured party when yields are rising by fixing the injured party with a yield that
reflects the dynamics of the market and not any inherent risk associated with the
cash flows that are intended to be valued. I turn now to the reasons which, in my
view, support this proposition.
354
The Capitalisation of Income method views an investment or income producing
property as no more than the stream of revenues that it may generate and values
those revenues based on the market price for the property at a particular point in
time. In this sense, this method uses the estimated market value of a property at a
particular point in time as a “proxy” for the value of all future cash flows generated
by the property including from its ultimate sale. Importantly, this method does not
directly seek to identify or value the cash flows that the property will generate or
identify and measure the risks associated with those cash flows being achieved.1040
Instead, the Capitalisation of Income method looks to the relationship between the
market price of comparable properties relative to their rent (the yield), which is
assumed to incorporate whatever discount that the market would apply to reflect
time value of money and investment risks at the time of purchase.
The
Capitalisation of Income method then applies that same relationship between market
price and rent (yield) to the known rental return on a property to estimate the
market price for that property, being the value the market would place on the stream
of cash flows the property would generate at that point in time.
As already
observed, the Capitalisation of Income method of valuation is extremely sensitive to
the yield selected such that a very small change in the yield will have a
disproportionally large effect on value.
1040
SC:KS
adjustment made by purchasers explicitly or implicitly to reflect the risk of those returns being
realised. Changes in yield can also reflect underlying market dynamics, such as an increase in
demand for property no matter what the risk.
It is for this reason that Mr Stone refers to the value of the property (its market price) as a “proxy”.
237
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
355
The difficulty with the Capitalisation of Income approach, in this case, is that the
yield that an investment property is capable of commanding in the market is a
reflection of the market’s perception of investment risk of the property relative to its
income stream as well as other dynamics of the market at a particular point in time
when a property is sold. Features of a property such as its location, specifications,
age, tenants, rent and outgoings, as well as the dynamics of the market and investor
sentiment, will all influence the market value of a property to an investor and
therefore the applicable yield.1041 By dividing the expected rental return by a yield
based on comparative sales at the date of completion of the development, as a proxy
for the value of all future cash flows and residual equity that would be earned by
NES, the Capitalisation of Income method implicitly discounts those future cash
flows, including the equity that would have been available at the end of the Lease,
on the basis of the dynamics of the property market, including the sentiments of
purchasers of comparative properties, as at the date of completion.
356
As stated in the preceding reasons, the evidence is that the Strathdale site would not
have been sold on completion of the development. Accordingly, it is not, in my
view, appropriate to fix the loss and damage intended to compensate NES by
reference to an implicit discount based on market dynamics and sentiment at a time
when the property would not have been sold, or the income capitalised. Instead, the
Court should, in my view, look to value the actual cash flows NES would have
achieved, having regard to when these would have been achieved and the risks of
those cash flows not being achieved. Where it is necessary or desirable to apply a
yield, for example to determine the market value of the land at the end of the Lease,
the yield that should be applied is the yield that best reflects the market dynamics
and sentiment at that time, being the time at which the property may otherwise have
been sold. In this case, the yields of Mr Sutherland, which are the most up-to-date
yields available, should be applied.
357
Moreover, to fix NES’s loss and damage by reference to a yield as at the date of
1041
Kemi Nominees Pty Ltd v Department of Transport (1996-1997) 16 QLCR 607 at 623.
SC:KS
238
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
completion, while simple and expedient as a means of valuation, is inappropriate
and unrealistic in the circumstances.
The effect of capitalising NES’s expected
income at the date of completion, by reference to the yield that prevailed at that date,
when this date has no relation to the date on which the property might have been
sold, and where yields are increasing, will have the effect of undervaluing the cash
flows that NES would in fact have obtained from the property. This is particularly
so for the residual (capital) value of the land which would not have been sold for
some time. In doing so, this method would put NES in a far worse position than the
position that it would have in fact been in had NES held onto the Strathdale site, and
enjoyed the full cash flows and capital at a lesser discount, as it intended.
358
The Capitalisation of Income method is also inappropriate in the present case for
other reasons, including that the rental income under the Lease was not fixed;1042
there were no comparable sales of Masters stores from which to select a yield;1043 and
the assessment of the applicable yield did not, and could not have, taken into
account the risks associated with investing in the property and underlying market
dynamics as at the likely date of sale, which date had not yet arrived.
The evidence of Ms Wright and Mr Jackson on valuation
359
Ms Wright agreed with Mr Stone’s methodology of measuring loss and damage by
comparing actual and expected cash flows.1044 Ms Wright also agreed with Mr Stone
that the “value of the completed development” should reflect the value of the lease
and anticipated cash flows under it as at a particular valuation date.1045 Ms Wright
expressed no opinion about what the valuation date should be, nor did she express
an opinion on the accuracy of Mr Stone’s calculations of the value of the completed
development.1046
360
Mr Jackson agreed that the Capitalisation of Income approach is “one of” the most
1042
But was to be increased annually based on inflation: Court Book 1047.
Transcript 1245.
Expert Report of Dawna Wright (13 May 2015) [2.1.2], [4.1].
Expert Report of Dawna Wright (13 May 2015) [2.1.5], [4.2].
Expert Report of Dawna Wright (13 May 2015) [4.2.3].
1043
1044
1045
1046
SC:KS
239
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
used and preferred methods for determining the value of property and is “an”
appropriate approach to determine the value of the Property at the time of
valuation.1047 Mr Jackson agreed that the calculation of the net present value of
income under the lease and the exit value of the property was a valid alternative to
that method.1048
361
Ms Wright calculated what the impact would be on Mr Stone’s (Capitalisation of
Income) estimate of NES’s loss if different assumptions were made about the amount
of Masters’ contribution and higher yields (of 7 per cent and 8.4 per cent).1049 For the
preceding reasons, the assumption that had Woolworths acted reasonably and in
good faith they would have paid a contribution amount of less than $2.94 million—
being the revised NES contribution amount1050—which was less than the Rider Hunt
estimate at the conclusion of the open book process,1051 can safely be rejected.
Likewise, for the reasons which follow, yields of 7 per cent, 8 per cent and 8.4 per
cent should also be rejected. It is noted that the assumed yield of 8.4 per cent is
materially higher than any yield identified by any expert in this proceeding save for
the sale of one re-branded Dahlsens store in Warragul identified in Mr Sutherland’s
report (“Bunnings Warragul”).1052 That sale is not comparative given that it had only
recently been rebranded as a Bunnings store and has different building
specifications. Accordingly, this yield can safely be rejected.
362
Ms Wright also expresses the opinion that when calculating the net present value of
a stream of cash flows (the Discounted Cash Flow method) a discount rate is
ordinarily applied to take into account both the time value of money and the risk
profile of the cash flows.1053 This much is accepted. Ms Wright also says that, by
only discounting for the time value of money, Mr Stone has not made allowances for
inflation or the risks associated with underlying cash flows. Mr Stone accepts that
1047
1048
1049
1050
1051
1052
1053
SC:KS
Expert Report of Grant Jackson (15 May 2015) [1.10].
Transcript 1251–2.
Expert Report of Dawna Wright (13 May 2015) [2.1.7], [4.3].
Court Book 3345.
Court Book 3293.
Expert Report of Grant Sutherland (27 May 2015) [56].
Expert Report of Dawna Wright (13 May 2015) [2.2.3], [5.2].
240
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
his Discounted Cash Flow calculations did not make any allowance for risk. NES
accepts that the purpose of the discount rate used is to account for both the time
value of money and the risks to cash flow inherent in such a business.1054 A risk free
discount rate has been used merely to avoid double counting when a Sellars discount
is applied by the Court to reflect the same risks.
363
Mr Stone, in my view rightly, said in his Supplementary Report:1055
In my experience it is not uncommon for courts to start with a net present
value figure which has only been discounted at the risk-free rate and to adjust
that figure based on the court’s view of the inherent risks associated with
those cash flows, which may be subject to separate evidence.
Ms Wright more particularly identifies the following risks that she says have not
been accounted for in the discount rate:1056
(a)
Inflation;
(b)
The possibility that agreement would not have been reached in relation to the
Landlord’s Works Costs or Masters’ contribution;
(c)
The possibility of variations, delays, cost increases or unforeseen costs or fees
associated with construction;
(d)
The possibility that Masters may not have exercised one or more of its options
to renew the Lease (including for reason that competitors may have affected
the viability of the Masters store);
(e)
The possibility that NES may not have been able to exercise its options to
purchase the land comprising the Strathdale site either within time or at all;
(f)
The possibility that NES would not have obtained funding for the
development;
(g)
1054
1055
1056
SC:KS
The possibility that NES would not have been able to obtain planning
See Haviv Holdings Pty Ltd v Howards Storage World Pty Ltd (2009) 254 ALR 273 at 294–5 [65]–[66].
Expert Report of Owain Stone (22 May 2015) [34].
Expert Report of Dawna Wright (13 May 2015) [5.2.3]–[5.2.7].
241
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
approval for the development.
It is clear from this list of risks, being precisely the same risks that the Court must
consider when determining what Sellars discount to apply, that it was appropriate
for Mr Stone to have determined the net present value of the stream of rent and
equity on a risk-free basis. Had Mr Stone done otherwise, there would have been
duplication once the Court applied a Sellars discount to any estimate of loss and
damage. Ms Wright agreed that where discounts were applied for the same risks,
this may result in a double-counting of risk.1057
364
Finally, Ms Wright’s evidence is that the net equity calculation by Mr Stone (being
his estimate of the exit value of the property at the end of the Lease) is flawed
because by valuing the equity by reference to the rental income in the last year of the
lease, it assumes an ongoing rental income even though no lease agreement would
exist.1058 In essence, Ms Wright says the Capitalisation of Income method is not
appropriate where the rent is not known.
365
Mr Jackson also gives evidence that in his opinion the value of the Strathdale site at
the end of the Lease should be assessed on the basis that there is no lease in place
and that it is potentially a vacant site.1059 Mr Jackson says it would be reasonable to
assume that at the end of the Lease the warehouse would have reached the end of its
economic life and would need upgrading, refurbishing or demolition.
If the
property was to be upgraded, a considerable allowance would need to be made for
capital expenditure. NES contends to the contrary and, in my view correctly, that
while the rental figure used by Mr Stone to determine the exit value of the property
is the amount that would have been payable for the last year of the Lease, which by
definition would have been terminated as at that point, the rental amount is
nevertheless the best estimate of what the market rent is likely to be at that time.
This is particularly so where the rent under the Lease is fixed at the lesser of CPI or
4 per cent which does not even preserve the real value of the current market rent. It
1057
1058
1059
SC:KS
Transcript 1394.
Expert Report of Dawna Wright (13 May 2015) [2.2.4], [5.3].
Expert Report of Grant Jackson (15 May 2015) [35].
242
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
is appropriate for Mr Stone to have calculated the exit value in the way that he did
and his estimate should be accepted.
366
Moreover, Mr Jackson’s concerns about the need for capital expenditure to upgrade
the site in order for it to be rented are misconceived in that they fail to take into
account that more than $2.3 million of “additional costs” of maintaining the property
have already been built into Mr Stone’s Discounted Cash Flow calculations.1060
Ms Wright conceded in cross examination that it was likely the Lease required the
landlord to maintain the premises in good order.1061 When cross-examined on the
basis of his conclusion that the appreciation of the underlying land value of the
Strathdale site coupled with the depreciation of the building would likely mean that
the highest and best use of the property at the end of the Lease would be as vacant
land for redevelopment purposes, Mr Jackson was not able to estimate the rate at
which the underlying land might appreciate.1062 Mr Jackson admitted that he had
not considered that point.1063 Mr Jackson was also unable to estimate what the
appreciation of the land might be from his own experience. Having not considered
the appreciation of the land or the obligation to maintain the premises, it is difficult
to see how Mr Jackson can have drawn the conclusions that he did that the best use
of the land at the end of the Lease would be for redevelopment.
367
I do, however, accept, as a general proposition, when considering the exit value of
the Bendigo site, the conclusion of Mr Jackson that, in addition to the net income
NES would have earned under the Lease, there would likely have been “some
considerable appreciation in land value” over the term of the Lease which NES
would have been entitled to the benefit of at the conclusion of the Lease.1064
Mr Stone’s estimate of the end value of the property at the conclusion of the Lease of
$19,824,000 million1065 compared with $52,082,527 million at the date of
1060
1061
1062
1063
1064
1065
SC:KS
Expert Report of Owain Stone (1 May 2015) Appendix C.
Transcript 1396.
Expert Report of Grant Jackson (15 May 2015) [40]; Transcript 1253–4.
Transcript 1253–4.
Expert Report of Grant Jackson (15 May 2015) [39].
Court Book 5983.
243
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
completion1066 is approximately 2.5 per cent (compound) increase in the value of the
land each year. I accept that, as a matter of common experience, such an assumption
is conservative and far from unrealistic.
368
In the result, there is nothing in the reports of Ms Wright or Mr Jackson that should
dissuade the Court from accepting Mr Stone’s estimate of NES’s loss and damage,
based on Mr Sutherland’s yield, being approximately $14.5 million before the
application of a Sellars discount to reflect the risks of the opportunity not being
realised.
The appropriate yield
369
As discussed previously, where the Capitalisation of Income method is to be used to
calculate the value of a lost opportunity, the choice of yield applied can be critical.
370
The evidence of Mr Sutherland was that the appropriate capitalisation rate (or yield)
as at the date of his report (being 27 May 2015) was in the range of 6.5 per cent to
6.75 per cent.1067 In contrast, Mr Jackson concludes that the applicable yield as at
1 July 2011 would be 8 per cent.1068
371
In my view, the yield selected by Mr Sutherland should be accepted and the yield
chosen by Mr Jackson should be rejected for a number of reasons; matters to which
I now turn.
What date should be used when determining the applicable yield?
372
Where market yields are decreasing (or increasing) over time and the Capitalisation
of Income method is highly sensitive to the choice of yield, careful consideration
must be given to the date at which the yield is selected. As discussed previously, an
injured party who has suffered damage as a result of a breach of contract is entitled
to such a sum as will put him in the position he would actually have been in but for
the breach of contract. It is this governing principle and not any temporal rule that
1066
1067
1068
SC:KS
Court Book 5986.
Expert Report of Grant Sutherland (27 May 2015) [59].
Expert Report of Grant Jackson (15 May 2015) [21].
244
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
determines what is to be taken into consideration in assessing loss and damage and
what is not.
An application of this principle requires “an appreciation of the
plaintiff’s actual position in comparison with the position he would have been in but
for the [breach of contract]”.1069 It is for this reason that the general rule is that
damages for torts and breach of contract are assessed as at the date of breach or
when the cause of action arises1070 is not absolute1071 or universal and must “give
way in particular cases to solutions best adapted to giving an injured plaintiff the
amount in damages which will most fairly compensate him for the wrong he has
suffered.”1072
373
Where there is some good reason that the usual measure of loss and damage
assessed as at the date of breach is inapposite then:1073
the court is entitled simply to assess the loss flowing directly from the
transaction without any reference to the date of transaction or indeed any
particular date. Such a course will be appropriate whenever the overriding
compensatory rule requires it.
The Court’s power to depart from the general rule whenever it is necessary to do so
in the interests of justice applies equally in both contract and tort cases.1074
374
One category of cases in which it is common for loss and damage to be assessed at a
later date than the date of breach is where to assess the damage at the date of breach
would leave the injured party exposed to deleterious effects (such as inflation or
foreign exchange risk). In such cases, the selection of a later date is intended to
reduce the burden (for example of inflation) on the victim and prevent any windfall
to the wrongdoer. There are other cases including where damages are awarded in
lieu of specific performance.1075 There are various reasons that loss may be assessed
1069
1070
1071
1072
1073
1074
1075
SC:KS
Johnson v Perez (1988) 166 CLR 351 at 371.
Johnson v Perez (1988) 166 CLR 351 at 355.
Johnson v Agnew [1980] 1 AC 367 at 401–2.
Johnson v Perez (1988) 166 CLR 351 at 355–6 (citations omitted).
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 667 quoting Smith New
Court Securities Ltd v Citibank NA [1997] AC 254 at 284. See also Fenridge Pty Ltd v Retirement Care
Australia (Preston) Pty Ltd [2013] VSC 464, [274].
Johnson v Perez (1988) 166 CLR 351 at 356.
See, eg, Johnson v Perez (1988) 166 CLR 351 at 386–8.
245
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
at a later point in time, where it is necessary to properly compensate a plaintiff.1076
These reasons include that the assessment of loss at a later point may enable the
Court to take into account evidence relevant to the assessment of loss that has
materialised since the date of the breach and facts that would have been mere
speculation as at the date of breach.1077 It may also be desirable to assess damages at
the date of trial where compensation is for losses into the future and there is no
compelling reason to select one point in time rather than another along the
continuum over which the damages extend.1078 A compelling reason for selecting a
particular time along a continuum of loss and damage is often the point at which the
plaintiff is able to mitigate its losses. Where there is a contract to purchase a good
and there is a ready market for that good the usual point will be the point of
breach.1079
375
In the present case, the opportunity for NES to develop and lease the Strathdale site
to Masters was a unique opportunity. The evidence was that NES had acquired
options to purchase the site1080 and the development was to be fully funded from
borrowings.1081 There was no evidence to suggest that NES could or should have
minimised its loss by purchasing or exploiting some other opportunity.
To the
contrary, NES explored alternative uses for the site but was unable to find any.1082
Having explored all other alternatives, NES ultimately let the options to purchase
the land expire so as to avoid incurring ongoing option fees.1083
In the
circumstances, there is no point of time at which it can properly be said that NES
could have or should have mitigated its losses nor is there any particular point at
which NES’s ongoing losses (being the ongoing loss of rent and capital appreciation
over the life of the lease) should be fixed having regard to notions of fairness to the
Defendants as the parties at fault.1084 Where the market conditions for the sale of
1076
1077
1078
1079
1080
1081
1082
1083
1084
SC:KS
See, eg, Johnson v Perez (1988) 166 CLR 351 at 386–8.
Johnson v Perez (1988) 166 CLR 351 at 388.
Johnson v Perez (1988) 166 CLR 351 at 388.
Johnson v Perez (1988) 166 CLR 351 at 388–9.
Outline of Brendan Edward Blake (6 March 2015) [35]–[46]; Court Book 785–833.
Outline of Brendan Edward Blake (6 March 2015) [430].
Outline of Brendan Edward Blake (6 March 2015) [241]–[246].
Outline of Brendan Edward Blake (6 March 2015) [240].
Johnson v Perez (1988) 166 CLR 351 at 357–8.
246
JUDGMENT
North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
land were improving over time (yields were decreasing) there is no principled
reason that NES should be fixed with the value of the Strathdale site at the
completion of the development when it in fact had no intention of selling the
development at that time. There is no dispute between the parties that any damages
payable to NES must be discounted to the date of breach. The disagreement relates
to the date on which the property should be valued. NES does not accept that this
should be at the date of completion of the development. The choice of the date of
valuation, as distinct from the date of assessment of loss and damage, determines the
choice of comparative properties and applicable yields (which reflect the sentiment
of purchasers in the market at a particular point in time). As even a small change in
yield can have a disproportionate effect on value, the choice of valuation date can be,
and in this case is, critical.1085 Woolworths submit that the value should be assessed
as at the date the development would have been completed. NES submits that the
value should be assessed as at the earlier of the date when the property would have
been sold or otherwise the date of the proceeding.
376
NES submits that, in fixing the valuation date, the Court should take into account (as
set out above) that NES intended to lease the Strathdale site to Masters for between
12 and 42 years and did not intend to sell the site at the completion of the
development. NES says that in these circumstances fixing its loss based on sales and
yields set by the market as at the date of the completion of the development, when it
had no intention of selling, would be unjust and contrary to the overriding
compensatory rule.1086
NES also submits that the choice of the later date for
valuation enables the Court to take into account, for comparison purposes, the sales
of Masters’ stores which NES submits are “truly comparable”1087 to the Strathdale
site rather than the Bunnings store sales available at the earlier date. NES submits
that yields as at the date of the proceeding also take into account the increased
supply of stores in the market arising from the Masters rollout, whereas the
1085
1086
1087
SC:KS
See the example in Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen &
Unwin, 4th ed, 2003) 373 in which a 1 per cent change in yield resulted in a $86 million or 21 per cent
difference in value.
See Johnson v Agnew [1980] 1 AC 367 at 401.
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 373.
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comparative sales at the date chosen by Woolworths does not.
377
For the preceding reasons and on the basis of the material to which reference is
made, I accept the submissions of NES that it is open to the Court to find, and the
Court should find on the basis of the evidence of Mr Sutherland, that the appropriate
date on which to capitalise the net income NES would have earned, for the purposes
of fixing loss and damage, is at the date of judgment. As such, the most recent yield
estimate, being that of Mr Sutherland, should be applied. The application of this
yield, and Mr Stone’s Discounted Cash Flow methodology, results in the loss and
damage estimate of approximately $14.5 million before a discount is applied for risk.
The yield selected by Mr Jackson
378
Even if, contrary to the position I have found, the loss suffered by NES is calculated
by reference to yields that applied as at 1 July 2011 (as Woolworths contend) the
yield of 8 per cent selected by Mr Jackson should not be accepted as it is not
supported by adequate comparable sales at that date.
379
The use of sales of comparative properties to infer value is well accepted but it is not
without its difficulties.
In Redeam Pty Ltd v South Australian Land Commission,
Jacobs J said:1088
It is unnecessary for me to say very much about the use and evidentiary value
of comparable sales.
The method of determining market value by
comparison with sales of similar land is widely accepted. The advantages
and pitfalls of the method are expounded in many texts and cases. As Lord
Wilberforce pointed out in Aik Hoe & Co Ltd v Superintendent of Lands and
Surveys:1089
In the search for evidence to show the market price of a given
property on a given date, there may be a continuous spectrum of cases
varying from contemporaneous sales of precisely similar properties
(unlikely to be found in many cases) to sales at different dates of
properties differing greatly in nature and development.
The greater the difference between the two properties, the less reliable is the
evidence of the sale of the allegedly comparable property. But that does not
mean that the evidence is totally irrelevant, if there remain significant points
of similarity. I adopt, with respect, the summary of Wells J in Crompton v
1088
1089
SC:KS
(1977) 17 SASR 508 at 513–14.
[1969] 1 AC 1 at 18.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
Commissioner of Highways:1090
Upon reading some works on comparable sales, one might be
pardoned for supposing that, within narrow limits of tolerance, sales
of land similar to the subject land must fall into two rigid categories:
comparable sales and non-comparable sales. Such a supposition
would, in my opinion, be an over-simplification and could lead to
error. It seems to me that, ideally, the valuer should, in the first
instance, look at the sales of land over a wide geographical and
temporal range, and from these select those that appear potentially
useful as a basis for comparison. Those selected should then be
carefully analysed by reference to an extensive list of characteristics of
land sales the compilation and assessment of which fall clearly within
the province of the experts. Whether or not one or more of those sales
is, and how it or they ought, to be compared with the subject land
becomes then a matter of degree, and a final decision is reached, often
by those same experts drawing a series of nice distinctions.
Obviously, no two sales of land will be found to be the same, or even
similar in all respects. Those that bear a close similarity to the
assumed sale of the subject land will be more reliable than those
whose similarity is less proximate and in respect of which adjustments
or allowances must be made before they can be safely introduced into
the valuation process. At a particular point it will be found that, in
respect of the remaining available sales, the adjustments and
allowances that would need to be made are of such a magnitude that
it ceases to be safe or sound to treat them as sufficiently similar to the
assumed sale of the subject land, and they must thenceforward be
rejected.
Where the valuation method employed involves the use of comparative sales,
adjustments must be made to ensure, as nearly as possible, the sales are “truly
comparable” and that the valuer is comparing “like with like”.1091 The extent to
which a sale can be relied upon as a comparative sale is a question of fact and
degree.1092
380
As the Strathdale site was to be one of the first Masters stores in Victoria, there were
no comparative sales of Masters stores as at 1 July 2011 from which to derive a
reliable yield.1093 As a result, in selecting a yield of 8 per cent, Mr Jackson relied
solely on sales of Bunnings stores. While there are obvious similarities between the
stores—both stores being “big box” hardware stores—there are many material
differences between Bunnings stores and Masters stores, including the cost and
1090
1091
1092
1093
SC:KS
(1973) 5 SASR 301 at 317.
Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 458–9.
Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 523.
Court Book 1245.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
quality of construction and lease terms that are likely to have had a material impact
on the yields available.1094 No adjustment was made for these differences.
381
Indeed, the only sale of a Masters store identified by either expert valuer was the
sale of the Masters store in Williams Landing in April 2015 which attracted a yield of
6.04 per cent. This is considerably lower than any of the yields relied upon by Mr
Jackson. That no Masters stores were on the market until April 2015 also serves to
reinforce NES’s contention that it would not have sold the Strathdale site at that time
and should not be fixed with a yield from that date. It is well established that in
selecting comparative sales a valuer must not be unreasonably selective in
circumstances where a fair estimate can only be made where there is a reasonably
representative group of comparable sales.1095 Even non-comparable sales may be
helpful for checking the valuation and its underlying assumptions.1096
382
In reaching his yield of 8 per cent, Mr Jackson selects only three “comparative sales”
being sales of Bunnings stores in Caroline Springs, Craigieburn and Pakenham.
These sales are to a single purchaser, Bunnings Warehouse Property Trust. Notably,
not one of those sales achieved a yield of 8 per cent or more.1097 Mr Jackson then
identifies four other “further sales” in New South Wales and Queensland which he
says provide further evidence of the yield a purchaser would accept.1098 These sales
were also all made to Bunnings Warehouse Property Trust and were the four highest
yielding sales in any year between 2011 and 2015.1099 Other sales in Newcastle NSW,
Gaven QLD, Singleton NSW, Ulladulla NSW and Kempsey in NSW, all of which had
yields of materially less than 8 per cent were also not included. Mr Jackson does
identify a sale of a Bunnings store in Bendigo, which yield was less than 8 per cent,
but excludes that sale on the basis that inter alia the yield was “lower than all of the
other evidence set out in the tables above.”1100 Mr Jackson then speculates about the
1094
1095
1096
1097
1098
1099
1100
SC:KS
Mr Jackson admitted as much in cross-examination: Transcript 1245.
Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 459.
Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 460, 523.
7.6 per cent, 7.6 per cent and 7.9 per cent: Expert Report of Grant Jackson (15 May 2015) [21].
Expert Report of Grant Jackson (15 May 2015) [22].
Save for the former Dahlsens store in Warragul, which can be excluded. See below [361].
Expert Report of Grant Jackson (15 May 2015) [28].
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possible reasons for the lower yield, namely that he believed the store had been
“under let” at the time.1101 In cross examination, it was evident that Mr Jackson had
no first-hand knowledge of the reasons for that yield.1102 Mr Jackson also did not
take into account yields achieved in 2013 or onwards (which are materially less than
in 2011) despite this timeframe being a far more realistic assessment of when NES
was likely to in fact capitalise its cash flows by selling the site. In all likelihood, NES
would continue to hold the site had it not been for Woolworths’ wrongful
termination of the Agreement for Lease.
383
It is well established that the location of a property is the key determinant of the
value of a property1103 and is potentially significant in identifying the comparative
sales to be relied upon.1104 Sales in the local area may, with appropriate adjustments,
be more helpful than comparative sales in that they are indicative of the state of the
market for properties of a similar location.1105 In this regard, it is notable that neither
Mr Jackson nor Mr Sutherland identified a single sale in the whole of Victoria
(comparative or otherwise) that achieved a yield of 8 per cent or more (being the
yield adopted by Mr Jackson). In order for Mr Jackson to justify his selection of such
a high yield, it was necessary for him to rely as “further sales” on the four highest
yielding sales1106 that occurred in Australia between 2011 and 2015, each of which
were to a single purchaser in New South Wales and Queensland.
384
Whether it be deliberately or inadvertently, Mr Jackson appears to have made a
questionable selection of properties from which to derive his yield, which had the
effect of diminishing the value of his assessment of NES’s loss and damage.1107 The
limited sample size and nature of the sites selected for (and excluded from)
comparison by Mr Jackson, which included the four highest yielding sales nationally
and which were limited to sales to a single purchaser, calls into question the validity
1101
1102
1103
1104
1105
1106
1107
SC:KS
Expert Report of Grant Jackson (15 May 2015) [30].
Transcript 1234.
Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 368.
Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 522.
Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 523.
Save for Bunnings Warragul, which can be excluded. See above [361].
See Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 511–12.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
of the yield arrived at even if the 1 July 2011 date was selected.1108
385
In my view, there is no reasonable justification for Mr Jackson restricting
consideration to such a limited number of stores or including high yielding but not
comparable sales in New South Wales and Queensland while excluding low yielding
but more comparable sales in Victoria (such as the Masters store in Williams
Landing or the Bunnings store in Bendigo, Torquay and Hastings). By contrast, the
approach adopted by Mr Sutherland was far more comprehensive both in terms of
the number of stores and the range of yields considered and should be preferred to
that of Mr Jackson. Mr Sutherland’s comparison involved a sample of 19 of the most
directly comparable Bunnings and Masters stores with yields ranging from 6.04 per
cent to 8.55 per cent, including eight Bunnings stores from Victoria.1109 The stores
within non-capital city locations were considered to be the most comparable. It is
notable that the interstate stores upon which Mr Jackson based his analysis have
significantly higher yields than any Victorian based stores considered in the
analysis.1110 Given the more comprehensive analysis undertaken by Mr Sutherland,
including the inclusion of Victorian stores and a wider range of yields, as well as the
absence of Masters sales or comparable sales in 2011 and the fact that NES would not
have sold the site at that time all lead to the same conclusion: that the yield selected
by Mr Sutherland should be preferred to the yield selected by Mr Jackson.
Moreover, given the absence of comparable sales in 2011, Mr Sutherland’s evidence
and conclusion as to yield should be preferred.
Conclusion: value of the lost opportunity
386
For the preceding reasons, the submission by NES that the Discounted Cash Flow
method1111 used in Mr Stone’s second calculation should be preferred to the
1108
1109
1110
1111
SC:KS
Transcript 1238.
The yield of 8.55 per cent relates to the Bunnings Warragul which was not a purpose built Bunnings
store. The store was also sold 12 months later with a yield of 7.29 per cent.
Mr Jackson admitted that the store comparisons outlined in Mr Sutherland’s report are, to the best of
his knowledge, accurate: Transcript 1250.
See Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003)
376.
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Capitalisation of Income method1112 used in Mr Stone’s first calculation and adopted
by Ms Wright is accepted.
Whatever model is adopted, where cash flows are
capitalised based on comparative sales, the Court should, in my view, find that the
appropriate time for that capitalisation (and selection of the applicable yield) is as
close to the date of judgment as is reasonably practicable. In this case, the yields of
Mr Sutherland should apply. To do otherwise, in circumstances where NES is not a
developer who intended to sell the development on completion, but is an operator of
supermarkets and stores1113 who intended to hold the Bendigo site for the duration
of the Lease, would have the effect of undervaluing the actual loss suffered by NES
and depriving NES of the full benefits of the Lease and the capital appreciation that
it would have obtained had it held onto the site for the period of the Lease. In
circumstances where NES intended to hold the land and to retain the net income
under the Lease as well as the capital appreciation of the land, what the market may
have paid for the Strathdale site had it been sold (or the cash flows capitalised) at
completion of the development is immaterial.
387
In the result, I accept the submissions of NES that it is open to the Court to find, and
the Court should find that the value of the opportunity that NES has lost (before
applying an appropriate discount for risk) is at least $14.5 million.1114
Discount to reflect risks
388
The question remains what discount the Court should apply to adjust the measure of
loss and damage so as to reflect the Court's assessment of the prospects of that
opportunity had it been pursued in accordance with the principles in Sellars.1115
389
In reaching that determination, the Court will assess “the degree of probability that
an event would have occurred, or might occur” and adjust the award of damages
1112
1113
1114
1115
SC:KS
See Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003)
371.
See, eg, Court Book 1207, 2631, 2633, 4803.
Being the net present value of the lost rent under the Lease (being approximately $10.7 million) plus
the net present value of the lost equity at the conclusion of the Lease (using the yield of
Mr Sutherland) being approximately $3.8 million, being a total of $14.5 million.
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
accordingly.1116
390
The same body of evidence, referred to earlier in these reasons with respect to
establishing the existence of loss, is also relevant to establishing the amount to be
recovered.1117 Having regard to the preceding reasons and the material relied upon,
I accept that:
(a)
The risk of the parties not reaching agreement in relation to the Landlord’s
Works Costs or Masters’ contribution if Woolworths acted reasonably and in
good faith was very low;
(b)
There was no more than the usual risk of delays associated with the
development or risks of inflation;
(c)
No allowance should be made for the risk of variations or unforeseen cost
increases associated with the development (as the risk of cost increases was
borne by Vaughan Constructions who provided a fixed price contract 1118 and
the risk of variations was borne by Woolworths who would have been
responsible for funding any such variations);
(d)
There was a risk that Masters may not have exercised one or more of its
options to renew the Lease (over its entire term). This risk may increase
slightly with each consecutive term. However, given Woolworths’ public
commitment to Masters, the importance of Bendigo as a regional centre and
the fact that no Woolworths witness gave evidence that the Lease was
unlikely to be renewed, NES submits that the overall risk of the Lease not
being renewed was no more than moderate;
(e)
Having regard to the statement of Mr Svanosio, the risk that NES may not
have been able to exercise its options to purchase the land comprising the
Strathdale site was extremely low;
1116
1117
1118
SC:KS
Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 643.
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 364: “in practice it will usually be the same body
of evidence that tends to establish both the existence of a loss and the amount to be recovered.”
Court Book 3001.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
(f)
Having regard to the evidence of Mr Stockwell and Mr McGregor the risk that
NES would not have obtained funding for the development was also low.
The Court should find that Bendigo Bank would not have turned down the
opportunity to fund such an important development in Bendigo, for a key
client, with a blue chip tenant, in circumstances where the transaction in
question served NES’s and the Bank’s interest that NES diversify its
investments; and
(g)
The risk that NES would not have been able to obtain planning approval for
the development is real; however, in light of the evidence of both planning
experts, and the absence of evidence from Urbis, as well as the support of the
State Government and the results of the other applications for planning
approval made to the Minister, the Court should find that this risk was also
very unlikely to eventuate.
391
While these risks are cumulative, NES submits that the total discount should be
more than the 20 per cent applied in Fenridge Pty Ltd v Retirement Care Australia
(Preston) Pty Ltd,1119 but significantly less than the 70 per cent applied in Reading
Entertainment Australia Pty Ltd v Whitehorse Property Group Ltd.1120 On balance, I
accept that, as NES contends, a discount of 25 per cent would be appropriate.
Applying that discount to NES’s loss and damage, as set out above, the damages
amount should, in my view, be fixed at $10.875 million—being 75 per cent of $14.5
million—plus interest.
Orders
392
For the preceding reasons, there will be judgment for NES for damages in the sum of
$10.875 million plus interest.
393
I otherwise reserve the question of costs and will hear the parties further on this
issue.
1119
1120
SC:KS
[2013] VSC 464.
[2007] VSCA 309.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
394
SC:KS
The parties are to bring in orders to give effect to these reasons.
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
CERTIFICATE
I certify that this and the two hundred and fifty-six preceding pages are a true copy
of the reasons for Judgment of Croft J of the Supreme Court of Victoria delivered on
28 January 2016.
DATED this twenty-eighth day of January 2016.
Associate
SC:KS
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North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd