Interpretation

There were surprisingly few appellate judgments during 2021 that considered the impact of Covid19 on the performance of contractual obligations. One such case, however, was the decision of the NSW Court of Appeal in Dyco Hotels Pty Ltd & Ors v Laundy Hotels (Quarry) Pty Ltd¹. Although a frustration argument was not pursued on appeal, the court did need to consider the impact of Covid on a hotel vendor's obligation to 'carry on the Business in the usual and ordinary course as regards its nature, scope and manner' until completion of the sale. Did the vendor comply with this obligation when public health orders restricted the operation of the hotel to being a small takeaway business? That is, to what extent should changes in the regulatory context be considered when deciding what is the 'usual and ordinary course'? There was no simple answer: although one appellate judge thought the vendor did comply with this obligation (having regard to what was usual during the period of the relevant public health orders), the majority disagreed. Although the vendor would not be liable for damages for breaching this obligation (given that compliance would have been illegal), the non-compliance meant that the vendor was required to refund the deposit and could not compel the purchaser to complete the contract.

In recent years, there has been much judicial consideration of the implied term of co-operation and related implied terms. Sometimes, however, parties include express obligations to a similar effect. For example, in Rankin Investments (Qld) Pty Ltd & Anor v CMC Property Pty Ltd & Ors² the Queensland Court of Appeal considered obligations 'to take all necessary steps … to give full effect to the provisions of this Agreement' and 'not to do or cause or permit to be done any act, matter or thing whereby in any way the continued enjoyment of the Land for the purposes of the Joint Venture might be jeopardised'. The case is a good example of courts giving provisions of this type a broad, commercial application.

The failure of a party to comply with a time period specified in the contract is a frequent source of contract disputes. If the failure is a breach of contract, there may be a dispute as to whether the other party is entitled to terminate. Subject to the terms of the contract, the mere failure to comply with a time period does not usually entitle the other party to terminate. This is sometimes described as time not 'being of the essence'. Conversely, the failure of a party to exercise a right within the time specified – such as not exercising an option within the specified time – generally will prevent the power being exercised; in this context, time is 'of the essence'.

In Chevron (TAPL) Pty Ltd v Pilbara Iron Company (Services) Pty Ltd³ the Western Australian Court of Appeal considered whether a party could initiate a price review, despite failing to do so within the contractually specified time. Consistently with other cases concerning the exercise of rights, rather than the performance of obligations, the court found that time was 'of the essence'. The reasoning of the court suggests, however, that the right/obligation distinction will not necessarily be determinative of disputes as to whether time is of the essence.

When heads of agreement envision a future, more detailed contract being entered into, then the heads of agreement itself could be characterised as:

• a non-binding agreement;
• a binding agreement to negotiate a more detailed contract (but not otherwise binding); or
• a binding agreement that will continue to operate even if a more detailed agreement cannot be agreed.

The heads of agreement itself should make this clear. If not, then disputes will arise such as that considered by the NSW Court of Appeal in AMA Group Limited v ASSK Investments Pty Limited⁴. In that case, the trial judge found that the heads of agreement was itself a binding agreement to sell a business, and that a condition precedent of board approval was only a condition precedent to the entry into a more detailed agreement (and was not a condition precedent to the sale of the business). The Court of Appeal disagreed, and held that the heads of agreement was only a binding agreement to try to negotiate a sale agreement, and that board approval was a condition precedent to any sale proceeding. These issues could have been resolved by clearer drafting, although there is always the possibility that the ambiguity in the agreement reflected a compromise between the parties when negotiating the heads of agreement.

Definitions are an essential tool in most commercial agreements. In theory, a definition should work so that each occurrence of the defined term can be replaced by its definition. In practice, a literal, complete insertion of the defined term often does not work. One method for dealing with this problem is to state that definitions apply 'unless the context otherwise requires'. This can, of course, lead to disputes as to whether the context does otherwise require – one such dispute came before the Queensland Court of Appeal in CS Energy Limited v GPS Power Pty Limited & Ors⁵. The court's judgment shows a willingness to take a commercial approach in determining when the context 'otherwise required'. Of course, in an ideal world parties would only use definitions where the entire definition can be inserted in place of each use of the defined term.

The use of surrounding circumstances when interpreting contracts continues to be an issue considered by appellate courts in Australia. In Ulladulla Creative Images Pty Ltd v Tibbles⁶ the NSW Court of Appeal confirmed the basic principles that, when interpreting a contract:

• a court may sometimes have regard to objective surrounding circumstances known to the parties that assist in identifying the purpose or object of the transaction; but
• a court may not have regard to the parties' statements reflecting their actual intentions and expectations.

In so far as the trial judge did have regard to evidence of a party's subjective intention in interpreting the agreement, this would have been an error. However, the court ultimately came to the same conclusion about how the contract should properly be interpreted.

The court also noted that evidence of matters known to the parties could be considered for the purpose of ascertaining the subject matter of the contract. The court therefore had regard to such evidence in determining what was 'the claim made against the Company's insurers' (the proceeds of which were to be shared among the parties).

Construction – obligation not to jeopardise enjoyment of the land for the purposes of a joint venture; construction – whether obligation to take all necessary steps to give effect to an agreement also prevents acts inconsistent with that agreement

In this case, the Queensland Court of Appeal considered an appeal from a finding of the Queensland Supreme Court that the appellants had breached terms of a joint venture agreement, entitling their fellow 'joint venturer' to buy them out. The terms found to have been breached in the lower court involved obligations upon the parties not to jeopardise 'the continued enjoyment of the land for the purpose of the Joint Venture' and to take all necessary steps to give effect to the agreement.

The court dismissed the appeal, and held that the appellants had breached their obligations to take all necessary steps to give effect to the agreement and/or to ensure continued enjoyment of the land for the joint venture. The notice of event of default, allowing buyout under the agreement, was therefore valid.

The decision shows the willingness of courts to enforce clauses that are expressly intended to facilitate the conduct of commercial endeavours.

The decision also highlights that obligations to take all necessary steps to effect an agreement will usually, and perhaps predictably, prevent conduct contrary to that agreement.

Facts

The parties to the dispute were in a joint venture to redevelop the Big Pineapple on the Sunshine Coast. This joint venture took the form of a company, Big Pineapple Corporation Pty Ltd, as trustee for the Big Pineapple Unit Trust (BPUT). The joint venture comprised:

• the appellants, Mr Rankin and his company, Rankin Investments (Qld) Pty Ltd, with a 50% interest in the BPUT (Rankin Interests); and
• the first respondent, CMC, which was controlled by Mr Kendall and Mr Ahern and collectively also had a 50% interest in BPUT (Kendall Interests, collectively with Rankin Interests, the joint venturers).

Under their agreement, the joint venturers agreed that Big Pineapple Corporation would 'lease, licence, and/or develop and/or ultimately dispose of the Property or do any other act, matter or thing as the Board may determine from time to time' (clause 2.1). The board was therefore made responsible for the project on behalf of the joint venture and its decisions would bind the joint venture (clause 5.4)

The Big Pineapple Corporation resolved to advance the development and engage several entities to assist, including for finance, contract tender, securing tenants and surveying. However, in late December 2019, Mr Rankin emailed these entities unilaterally and, in varying terms, told them to cease work indefinitely. The email thread forwarded by Mr Rankin revealed a dispute between the joint venturers to these third parties.

Subsequently, in early 2020, following the contractual process, a notice of event of default was served on the Rankin Interests. It triggered provisions within the joint venture agreement that entitled the Kendall Interests to buyout the Rankin Interests.

At first instance, the appellants, the Rankin Interests, challenged the validity of the notice of event default, arguing that they had not breached the joint venture agreement. This primarily turned on alleged breaches of clauses 6.1(a) and 6.1(c) of the agreement, which provide that each of the parties undertakes with the other:

• 6.1(a): 'to take all necessary steps on its part to give full effect to the provisions of this Agreement'; and
• 6.1(c): 'not to do or cause or permit to be done any act matter or thing whereby in any way the continued enjoyment of the Land for the purposes of the Joint Venture might be jeopardised'.

The challenge to the notice was unsuccessful and so the Rankin Interests appealed to the Queensland Court of Appeal.

Judgment

The court unanimously dismissed the appeal and held that the notice of event of default was valid. Necessary for that conclusion was a finding that the Rankin Interests had breached the joint venture agreement. The Justices' reasoning for this conclusion varied:

• Justice Applegarth, providing the primary reasoning referred to by the other two Justices, found that clauses 6.1(a) and (c) had been breached;
• Appeal Justice Bond agreed with the orders proposed by Justice Applegarth but would have instead based the conclusion on the breach of clause 6.1(a) (and did not consider it necessary to decide whether clause 6.1(c) had been breached); and
• President Sofronoff agreed with the reasons of both Justices and thus found breaches of both clause 6.1(a) and (c).

Clause 6.1(c)

The construction of clause 6.1(c) was significant in this case, as the conduct of the Rankin Interests in instructing the third parties to cease work did not directly bear upon the land on which the Big Pineapple sits.

Justice Applegarth was the only Justice to address clause 6.1(c). He found that the actions of the Rankin Interests in instructing the third parties to cease works amounted to a breach of clause 6.1(c). Importantly, in reaching this conclusion, he rejected a more narrow reading of that clause, that it would only limit actions that impaired the availability of the land for the joint venture. Instead, it was emphasised that the commercial and contractual context of 'continued enjoyment' extended to 'development with a view to leasing areas and possibly disposing of the property'. Instructing the third parties to cease works was thus found to be incompatible with this enjoyment of the land.

Clause 6.1(a)

The construction of clause 6.1(a) was also relevant as an alternate basis upon which the notice of event of default could be based.

Justice Applegarth elaborated on two possible routes to the conclusion that the clause had been breached. First, he addressed the question of whether the positive obligation within the clause 'to take all necessary steps … to give full effect to the provisions of the Agreement' gave rise to a negative corollary: that one must not take steps contrary to the agreement. Justice Applegarth addressed several arguments from the appellants that this negative corollary could not exist and dismissed contentions that:

• the express terms of clause 6.1(a) prevented the existence of such a term;
• the negative stipulations in other sub-paragraphs of clause 6.1, including clause 6.1(c), evidence an intention that the negative stipulation would not exist;
• the implication of such a negative stipulation was precluded by an entire agreement clause found within the joint venture agreement; and
• the negative stipulation was inappropriate, as whether something was inconsistent with the agreement was subject to an uncertain subjective lens.

Justice Applegarth dismissed these arguments, finding that the negative stipulation was not covered by the wording of clause 6.1(a) but could, and should, be implied. In doing so, the primacy of the parties' plain intentions was emphasised. Thus, the agreement was breached by taking a step incompatible with giving effect to it – interfering with the resolutions of the Big Pineapple Corporation.

However, Justice Applegarth, joined by both other Justices, also articulated an alternate path of reasoning to the same result. The simpler and shorter reasoning involved an inquiry into whether the Rankin Interests had taken 'all necessary steps' to give effect to the agreement. It was found that they had not, by virtue of not implementing the resolutions of the company to engage the third parties.

Finally, the court also dismissed a request for leave to argue a new point that the conduct of Mr Rankin was not conduct of the 'joint venturers' under the agreement, as it would have required consideration of further evidence.

The appeal was therefore dismissed and the notice of event of default found to be valid.

Interpretation of contract – condition precedent

In this case, the NSW Court of Appeal considered whether:

• a 'Binding Heads of Agreement' was a binding agreement to sell a business, or merely a binding agreement to try to negotiate a sale of business agreement; and
• whether any sale or agreement was conditional on the approval of the purchaser's board.

The court allowed the appeal, finding that the parties only agreed to negotiate a sale of business agreement and that this obligation was subject to board approval of the purchaser.

This case illustrates the ambiguities that can arise from 'binding' heads of agreement that envisage further agreements and are subject to 'board approval'.

Facts

The parties entered into a 'Binding Heads of Agreement' (HOA) for AMA to acquire ASSK Investments. The relevant clauses of the agreement were:

• clause 2(b), which stated that the 'parties agree to enter into Business Sale Agreements subject to the terms and conditions set out in' the HOA;
• clause 6, which provided for AMA to 'carry out a comprehensive due diligence' and, subject to that process, 'the transaction will be recorded in a Business Sale Agreement'; and
• clause 7(b), which was labelled as a condition precedent and required 'all necessary third party consents, authorisations and approvals being obtained (including the Purchaser's Board approval)'.

After the execution of the HOA, AMA completed a due diligence process. It concluded that the deal did not meet the requirements for board approval and terminated the agreement. ASSK Investments sought an order for specific performance and was successful at first instance.

Judgment

The primary issues for the court were:

1. whether the HOA was an agreement to sell the business, or merely an agreement to negotiate a sale agreement; and
2. whether clause 7(b) was a condition precedent.

President Bell (with whom Justices Leeming and Emmett agreed) allowed the appeal and held that:

• the HOA comprised an obligation to negotiate a business sale agreement; and
• clause 7(b) was a condition precedent to that obligation.

On the first issue, the court disagreed with the primary judge's conclusion that the HOA 'legislate[d] comprehensively for the sale and purchase of the Business'. The court noted that the HOA did not identify any material contracts or key personnel, envisaged further due diligence and left open the possibility of further warranties. Any sale was therefore to be effected by a new agreement, not the HOA.

On the second issue, the court stated that clause 2 made it explicitly clear that the agreement was conditional upon the terms and conditions set out in the agreement. One of those conditions was the approval of AMA's board. The condition was not satisfied and AMA was therefore entitled to terminate the agreement.

In response to an argument that this conclusion would make the promises in the HOA illusory, the court observed that where a contract affords one party a discretion, or where a contract is subject to a party's approval, there is usually an implied requirement for the benefiting party to act honestly, and sometimes reasonably, in exercising that power. However, there was no issue before the court as to the honesty or reasonableness of the board's decision.

Whether monies received from an insurance claim by the company are payable to former shareholders under a share sale agreement

In this case, the NSW Court of Appeal considered whether former shareholders of a company were entitled, under a share sale agreement, to monies received by the company for losses not covered by its insurance policy.

The court held that, on its construction, the uninsured losses were payable to the respondents under the share sale agreement.

This case illustrates the use by courts of evidence of 'surrounding circumstances' when interpreting ambiguous clauses, and the difference between admissible evidence of surrounding circumstances and inadmissible evidence of the parties' expectations.

Facts

The respondents entered into a share sale agreement (the agreement) to sell their shareholdings in the appellant. Clause 15 of the agreement related to an insurance claim that the appellant had made under its insurance policy with its insurer, QBE Insurance (Australia) Ltd (the policy and QBE, respectively), for damage and loss of business that it suffered from a fire originating from a neighbouring property. The clause provided:

• 15.1: The Company has made a claim against the Company's Insurers for loss arising out of a fire that took place in the premises known as Unit 83 Collers [sic] Road, Ulladulla, being Lot 18 in Strata Plan 82760 (the 'Premises').
• 15.2: The Company agrees that if it receives any further money from the Insurance Company beyond those monies received up to the date of this Agreement then any such monies shall be divided equally between the shareholders Debbie, Ian, Karen and John paid to each of the parties within seven (7) days from the date of the receipt of any such monies of the Insurance Company.

Between the time of the fire and entering into the agreement, the appellant made two claims with QBE under its policy, one for property damage and one for business interruption insurance. The appellant also pursued another claim to recover uninsured losses against the owner of the neighbouring property where the fire originated. The neighbour was also insured by QBE. While the amount received from the policy was distributed (or agreed to be distributed) equally in accordance with clause 15.2, the amount received from the appellant's uninsured loss claim was not.

Judgment

Interpretation of clause 15

The court applied the reasoning in Toll (FDCT) Pty Ltd v Alphapharm Pty Ltd (2004) 291 CLR 165 that the 'meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean', which 'normally, requires consideration not only to the text, but also of the surrounding circumstances known to the parties, and the purpose of the transactions'. In doing so, the court noted that:

• the purpose of the agreement was to sell a small business that had recently been impacted by a fire;
• the parties were commercially unsophisticated;
• the parties did not possess specialised knowledge of an insurance 'claim'; and
• the respondents did not have oversight of the appellant's insurance claim.

For these reasons, the court construed the plain words of the clause to include any amounts paid by QBE as a result of the claim against the neighbour. In reaching this conclusion, the court:

1. had regard to the fact that the appellant had asked QBE (as its insurer) to bring a subrogated claim against the neighbour, as this evidence was admissible to explain the phrase 'claim against the Company's insurers' in clause 15.1; but
2. did not have regard to a file note of a solicitor (allegedly) recording the parties' expectations as to how such recoveries might be distributed.

The uninsured losses were therefore required to be paid in accordance with clause 15.2 to the respondents.

In reaching this conclusion, the court accepted that clause 15.1 had no operative effect and acted as a recital to clause 15.2. However, that did not mean clause 15.1 was redundant, because it aided in the interpretation of clause 15.2 by limiting 'further money' to the fire described in the clause. The absence of clause 15.1, read literally, would require the appellant to pay out any money that it received from its insurance provider at any point for any event.