Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited & Ors [2007] HCATrans 401 (3 August 2007)

Last Updated: 7 August 2007

[2007] HCATrans 401

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S86 of 2007

B e t w e e n -

GUMLAND PROPERTY HOLDINGS PTY LIMITED

Applicant

and

DUFFY BROS FRUIT MARKET (CAMPBELLTOWN) PTY LIMITED

First Respondent

FERDINANDO PISCIUNERI

Second Respondent

NATALE PISCIUNERI

Third Respondent

Application for special leave to appeal

GLEESON CJ
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 3 AUGUST 2007, AT 9.51 AM

Copyright in the High Court of Australia

__________________

MR J.N. WEST, QC: May it please the Court, I appear with my learned friend, MR N.J. KIDD, for the applicant. (instructed by PricewaterhouseCoopers Legal)

MR G.C. LINDSAY, SC: May it please the Court, I appear with MR R.G.H. KELLER for the respondents. (Davis Legal)

GLEESON CJ: I thought we were going to see Mr Ellicott here.

MR WEST: My learned friend and I are tag teaming this case, your Honour. I ran the trial, I lost the bargain damages. Mr Ellicott ran the appeal and lost them but got up against the guarantors and now I am here to take the result.

Your Honours, the context in which this arises – this case arises for three special leave points, the third being consequential upon success on either of the first two - is a lease of a shop in a shopping centre was a long-term lease of 15 years. By the terms of the lease rent payable under the covenant to pay rent was declared to be an essential term. Some six years into the lease, trading conditions going not favourably for the lessee, the lessor, the original owner of the shopping centre, and the lessee entered into negotiations which resulted in a deed which was made in 1999.

The deed in substance did the following things. It brought to account the arrears of rental and outgoings which had occurred because of the inability of the lessee to keep paying. It declared that those debts would be paid in accordance with a regime specified in the deed. It then varied the payment obligations under the lease travelling forwards. It did it by a mechanism which had regard to the turnover of the fruit shop into the future and it did it in the knowledge and in the recognition that under the terms of the deed the lessee was able to sublease part of the demised premises, which he did.

In the event that what was anticipated to be lesser rental and outgoings amounts would be paid in the period to the end of the lease and in the event that the lessee did not default during that period, the expectation was that the amount of rental which would have been paid to the conclusion of the lease would, under the amended arrangements, have been less than it would have been had the original provisions prevailed.

As it turned out, the lessee was successful in subletting part of the demised premises. Ultimately, a sublease to Woolworths was entered into. Thereafter, our client, Gumland, acquired the freehold. It effectively acquired the reversion. It therefore was not a party to the lease or the sublease or the deed.

However, during the early 2000s, shall we say, a dispute arose about the capacity of the lessee to continue to trade. The lessee peremptorily in June 2002 ceased to trade and left the premises but left his fixtures and fittings therein. Woolworths unilaterally decided that they would not pay in respect of the sublet area the whole amount of the lease payment for which they were liable and our client then turned around and said to the lessee, “Now, listen, under the terms of the lease arrangements as varied - - -

GLEESON CJ: Said to the lessor.

MR WEST: We said to the lessee, your Honour. We had succeeded to the - that they were liable, as indeed they were, under the terms of the amended arrangements to ensure that the total amount of the rent for the demised premises including the sublet area was paid. So they had to pay not only their own but also to pay what Woolworths were liable for in the event that Woolworths did not.

GLEESON CJ: Had Woolworths been paying direct to your client or had Duffy?

MR WEST: They had, your Honour. They had been paying direct to us. Duffys had been continuing to pay for their part of the demised premises. It was also said to Duffys that they were not entitled to simply leave the premises as it were in desuetude and cease trading, that that was a breach of the lease.

GLEESON CJ: One thing everybody is agreed on so far is that there was no repudiatory conduct by Duffys. You challenged that, I understand.

MR WEST: The judges have all said, yes, there was no repudiatory conduct. Your Honour, we seek to challenge the two relevant findings in this area in the Court of Appeal, namely, that the finding made by the Court of Appeal but not made by the trial judge that the failure to pay the rent was a breach of an essential term thereby entitling us when we sue to sue for loss of a bargain damages, Shevill and so on.

GLEESON CJ: Am I right in thinking on that point that the point of departure between Acting Justice Macready and the Court of Appeal appears on page 116 in paragraph 136 and on page 125 under subheading D?

MR WEST: Yes, your Honour. If I may answer your Honour this way, that appears to be the genesis of the problem. His Honour the trial judge accepted that what happened by reading the lease and the deed together was that the deed varied the covenant to pay rent under the lease. The documents cross referred and by a declaration in clause 2 of the deed the parties declared and affirmed that the lease was to apply as varied by the deed. When the matter got to the Court of Appeal the Court of Appeal reasoned this way. They said that the obligation to pay the amended rent, although it was rental and outgoings under the deed, it was not an obligation arising under the lease at all. It arose and arose only under the deed itself, therefore it was not an “essential term” as defined in the lease because the lease defined “essential terms” by reference to clause numbers, not subject matter.

GLEESON CJ: There is a little problem here, Mr West. Whoever is right or wrong about that point, it does not sound like a special leave point.

MR WEST: Your Honour, in our respectful submission, there is a small question of construction but a very large question of principle. The fact that these commercial parties, in our respectful submission, intended to vary the lease’s rental obligations was an important matter and when the Court of Appeal decided this matter the way they did, in our respectful submission, they departed from two other provisions of their own reasoning where they essentially treated the relation between the deed and the lease in the way for which we contend. May I illustrate that? If your Honours would go to page 128 of the application book, paragraph 177:

Was failure to pay the cl 10.2(c) amount –

that is the relevant amount –

breach of a term which the parties had agreed was essential? The issue is related to whether there was a Scheduled Breach of the Lease –

That takes me back to the point your Honour the Chief Justice made a moment ago where his Honour Justice Giles explained his reasoning as to what a scheduled breach of the lease was. That type of reasoning was applied here. So that his Honour concludes:

It was a breach of the promise in cl 10.2 of the 1999 Deed to pay the cl 10.2(c) amount. The promise to pay the cl 10.2(c) amount was a promise to pay different amounts at different times from those payable under cl 3 of the Lease. The breach was not breach of a term which the parties had agreed was essential.

If one then goes back to paragraph 120, which is found at page 109, his Honour said this:

It was not correct that Duffy Bros was liable as sub-lessor to pay its sub-lessee’s rent and outgoings, or to liken it to a surety for the sub-lessee. It was liable as lessee for the cl 10.2(c) amount. Duffy Bros remained the lessee from Transit of the area of the original Shop 10, which included Shop 10A. The 1999 Deed changed the timing and amount of what it had to pay “for rent and outgoings payable by Duffys under the Lease”, but whatever it had to pay was still for rent and outgoings for the whole of what became Shop 10 and Shop 10A.

With great respect, your Honour, we submit that is correct, but that is an approach inconsistent with a somewhat - - -

GUMMOW J: You say there is a disconformity between paragraphs 120 and 177?

MR WEST: With respect, yes, your Honour, and it is a disconformity which is repeated in paragraph 155.

GUMMOW J: Yes, assume you are right about that?

MR WEST: Then, your Honour, we have a situation where, with respect, the Court of Appeal had misdirected itself on an essential matter and the result of that is to work a manifest injustice upon our client in circumstances where, as a matter of principle, businessmen would be entitled to think that if they agree as between themselves that a term of a lease as varied is an essential term, then, if there is breach of that provision, they should be entitled to loss of the bargain damages and the result of this is to remove that very substantial benefit from the parties.

GUMMOW J: But you would want to establish before us that what was said at 120 was correct, would you?

MR WEST: We do, your Honour.

GUMMOW J: And that the rest was wrong?

MR WEST: The rest was wrong.

GUMMOW J: We have to be sufficiently confident now that that is what we would be likely to decide.

MR WEST: May I take you to how that is done and may I just finish the reference to this. The other disconformity is at paragraph 155, page 121 where his Honour says this:

As I have said, the 1999 Deed provided a new regime for the timing and amounts for payment of the rent and outgoings payable under the Lease. But it did so in a manner plainly intended to preserve to Transit recovery of the rent and outgoings payable under the Lease, if there was breach within cl 10.1 or if at the time of termination there was continuing breach contrary to the proviso. That is apparent from the continuance of the Lease with Duffy Bros as lessee of the area of the original Shop 10, and its ratification and affirmation subject to the terms of the 1999 Deed in cl 2 of that Deed; from cl 10.1, the effect of which was to defer payment subject to a condition; from the reference to the amounts in cl 10.2 as sums for rent and outgoings payable by Duffy Bros under the Lease; from the proviso referring to acceptance of the sums payable under cl 10.2(a), (b) and (c) in satisfaction of rent and outgoings payable by Duffy Bros under the Lease –

So we submit that that disconformity then becomes obvious and the provision that his Honour was referring to in relation to these provisions, 10.2, and how the rent was to be calculated is found at application book page 81, paragraph 28. In fact, your Honour, it would be worth my while if I might just spend a moment inviting the Court to look at what appears on page 79, paragraph 22, the 1999 deed. Skipping over the recounting of trading conditions and the recitals, save only to pause to note that the parties wish their commercial relationship to continue, on the next page 80, paragraph 23:

“Ratification and affirmation

2. Subject to the terms of this Deed the parties ratify and affirm the terms of the Lease”.

Then the area occupied is set out, the subletting is dealt with. At paragraph 27 his Honour explains in a brief but perfectly reasonable way for this purpose how the turnover calculations were made. Then:

10.1 For the purpose of interpreting clause 10.2 any payment due by Duffys under Clause 10.2(d) is not due and payable until the 29th March, 2008 –

that was the expiry date for the lease –

or upon an earlier Scheduled Breach of the Lease by Duffy’s or an earlier breach of this Deed . . .

10.2 Duffys shall pay to Transit the aggregate of the following sums for rent and outgoings payable by Duffys under the Lease –

We respectfully submit that the proper interpretation of these documents is that this document is saying that the covenant to pay rent under the lease - - -

GUMMOW J: Is there not a debate about this phrase in 10.2(c) “entered into pursuant to clause 4 of this Deed” and not otherwise is the implicit suggestion, I think?

MR WEST: Your Honour, that just directs the circumstance in which a third party can come into the arrangement, but it does not have any effect upon the payment of rental as being rental under the lease, in our respectful submission. Your Honours, we submit that so read the parties were plainly intending that they were varying the lease in the way that the trial judge found and the way in which his Honour in the Court of Appeal has interpreted the matter gives rise to some exquisite problems of its own. This lease has no essential existence upon its own. The deed, rather, has no existence apart – freestanding it does nothing.

If one is committing a breach not of the lease but of the deed, one asks, what consequence flows from that? If the rental arrangements only flow from the terms of the deed and not from the lease, then if one breaches this and one is sued upon failure to pay in accordance with this document, that is not an action in relation to the lease itself. If this terminates, what happens to the lease? Does the lease rebound? His Honour Justice Giles seemed to say at one point in his judgment that it did not.

But, your Honour, the two documents cannot live together, in our respectful submission, if the approach taken by the Court of Appeal is right. Subject to that question of interpretation, the result that has befallen our client is substantial and surprising given what commercial men, we respectfully submit, would have intended by these arrangements.

GUMMOW J: The special leave point becomes a miscarriage of justice point.

MR WEST: It does, your Honour. We rely on that point to get us home on the first and the second point. The second point is the repudiation point which arises by reference to the failure to pay the differential in the rental which should have been paid by Woolworths. That refusal to pay was based upon an incorrect – it was found to be an incorrect interpretation on the part of the lessee of the terms of the rental arrangements. What the Court of Appeal did after referring to DTR v Mona Homes, referring to the authority in this Court, it then applied a principle which, in our respectful submission, does not find a basis in DTR or any other case.

GUMMOW J: Namely?

MR WEST: Namely, that what appeared to be repudiatory conduct in failure to pay by reason of an incorrect interpretation the right to sue was lost because we had left it for about a year before we actually issued the notice requiring payment.

GLEESON CJ: Did not Duffy’s lawyers keep writing and insisting that they were intending to abide by the contract?

MR WEST: Your Honour, that correspondence died away in 2002 and what happened after it, there was no reconciliation. Gumland issued month by month the invoices for rental and those invoices contained not only the demand to pay for the current month, but the running balance of the arrears and that was simply ignored. This was a case of a continuing breach. It was not a situation where there had been a breach in, say, 2002 or 2003 and then nothing is done about it until a year later. This is a case where there was continuing breach and the point is reached - we respectfully submit Capalaba makes this point very clearly by reference to Lord Shaw’s speech that a point in time is reached when a businessman says enough is enough and that is what happened here, whereas his Honour in the Court of Appeal in paragraph 199 on page 135 appears to reason in a slightly different way. His Honour says:

For the reasons earlier given, I do not think that cl 3 of the 1999 Deed –

that was the trading obligation, was –

an essential character.

That does not matter –

Duffy Bros was paying the Higher Rents.

With respect, that does not matter. They were not paying another important part of the lease, namely, the obligation to pay rent for the whole of the sublet area –

A reasonable person in the position of Gumland would have appreciated that it was not paying the rent unpaid by Woolworths because of a view of its liability for the cl 10.2(c) amount different from that of Gumland, but until the notice of 3 July 2003 without great complaint from Gumland; for the best part of a year Gumland let that situation exist.

But, with respect, your Honour, that is a qualification which does not find warrant in DTR.

GLEESON CJ: Thank you, Mr West. Yes, Mr Lindsay.

MR LINDSAY: In our submission, the application should be refused because the first two questions do not involve any questions of public importance or warrant a grant of special leave. The first of my friend’s questions is essentially a question of construction.

GUMMOW J: What about the miscarriage of justice point?

MR LINDSAY: In my submission, there is no miscarriage of justice. The approach adopted by the Court of Appeal in paragraph 177 is entirely correct and open to it. If one goes to that, the bottom line is that clause 7 of the lease, which is picked up in the definition of “scheduled breach” - - -

GLEESON CJ: Where do we find that most conveniently?

MR LINDSAY: At page 81. We see at the bottom of the page there is a definition of “scheduled breach” in paragraph 29. Clause 7 is at page 74 and, relevantly, it is clause 7.1.1.

GLEESON CJ: I would just like you to explain by reference to the documents, that is, the lease and the deed, why failure to pay rent under the deed is not a breach of an essential term of the lease.

MR LINDSAY: Because there is a debate between the parties, and there was in the Court of Appeal, as to whether the effect of the 1999 deed was an amendment or a formal variation of the lease or whether it was some form of side agreement.

GUMMOW J: What in legal analysis turns upon all these expressions?

MR LINDSAY: At the end of the day the Court of Appeal said that it did not because the question ultimately was a matter of construction as to whether or not there had been a scheduled breach.

GLEESON CJ: Construction of what?

MR LINDSAY: Construction, first of all, of the deed, clause 10, and the definition in clause 10 - - -

GUMMOW J: This is at page 81?

MR LINDSAY: At page 81, yes. In this analysis we start from the proposition that the court found that there was a breach of clause 10.2(c) and then the question is whether or not that was a scheduled breach of the lease.

GLEESON CJ: Why is that the question?

MR LINDSAY: Because that expression is picked up in clause 10.1 at about lines 22, 23.

GUMMOW J: I am not sure I am following this.

MR LINDSAY: A breach of clause 10.2(c) had the effect of accelerating payments. That is one aspect, and I perhaps have misled your Honours by going down that route, but the concept of a scheduled breach of the lease could pick up clause 7 of the lease and that is what my friends argue occurred. If one goes to clause 7 of the lease, which is at page 74, one sees that insofar as the topic of rent is dealt with, the essentiality declaration deals with clause 3 of the lease which is summarised - - -

GUMMOW J: I am not following you, Mr Lindsay. I have gone to clause 7 on page 74. Just take me to the words.

MR LINDSAY: Clause 7 has the effect that certain breaches of the lease are defined as essential breaches. The extract of clause 7 - - -

GLEESON CJ: I do not think so. At least the words I am looking at say that certain terms are “essential terms”.

MR LINDSAY: I am sorry, that is correct.

GLEESON CJ: We would like to identify the question of construction and resolve it by looking at the text.

MR LINDSAY: Yes. The question that arises is the interrelationship between the deed on the one hand and the lease on the other. The only breach relevantly, if there was a breach, was a breach of clause 10.2(c) of the deed. So we start from the question whether that was in some way a breach of the lease enabling my friends to rely upon the declaration of essentiality, to use the general expression - - -

GLEESON CJ: That obligation under 10.2(c) resulted, did it, from the failure of Woolworths to make payments?

MR LINDSAY: Correct.

GLEESON CJ: So Woolworth’s failure to make payments put Duffys in breach of clause 10.2(c)?

MR LINDSAY: That was what was found, yes.

GLEESON CJ: That then gives rise to what question?

MR LINDSAY: That gives rise to the question whether that breach picked up clause 7.1.1 of the lease.

GLEESON CJ: Is the question whether or not the failure of Duffys to comply with 10.2(c) because of the default of Woolworths amounted to a breach by Duffys of an essential term of the lease?

MR LINDSAY: That is so.

GLEESON CJ: Is that the question of construction?

MR LINDSAY: That is so and if it did, it did so through the medium of clause 7.1.1 of the lease.

GLEESON CJ: But is that the question of construction?

MR LINDSAY: It is.

GLEESON CJ: Was a failure by Duffys to pay the rent for the shop that Woolworths were occupying or had occupied a breach by Duffys of an essential term of the lease to Duffy?

MR LINDSAY: Correct. What the Court of Appeal found was that the breach of clause 10.2(c) was a breach of the obligation to pay moneys under clause 10.2(c), not an obligation to pay rent under clause 3 of the lease.

GLEESON CJ: Because, is it, the Court of Appeal took the view that what I might call the rearrangement of the contractual situation reflected in the sublease to Woolworths and the deed generally did not, as a matter of construction of the lease, produce the consequence that Duffy’s obligations under 10.2(c) of the deed were – I am sorry, the breach of Duffy’s obligations under 10.2(c) was a breach of an essential term of the lease?

MR LINDSAY: Correct.

GLEESON CJ: In other words, they took the view that the liability assumed by Duffys to cover Woolworths’ default under 10.2(c) was not an obligation that arose under one of the essential terms referred to in clause 7?

MR LINDSAY: Correct.

GLEESON CJ: Yes, I follow.

GUMMOW J: Despite the opening words of 10.2 on page 81 and clause 2 of the deed at the top of page 80?

MR LINDSAY: There is an area of debate, or was, as - - -

GUMMOW J: One might have thought one view is, I suppose, it was all designed to lock it together.

MR LINDSAY: That is one view. The competing view was that the moneys that were payable under clause 10.2 were payable, in effect, in lieu of rent and so they were operating to suspend any obligation to pay rent under the lease as such and replacing that obligation - - -

GLEESON CJ: Those words “as such” are the key words in that proposition, are they not?

MR LINDSAY: Undoubtedly.

GLEESON CJ: Actually, you could always say “per se”.

MR LINDSAY: I could try. But in any event, whichever is the correct approach, in our submission, it is a question of construction involving no special leave point and there is no miscarriage of justice. So on that point, that is the position on the question of repudiation. The two levels of court that have looked at the question have declined to find repudiation, that the court applied an objective test and noted that over a period of a year, really, both parties acquiesced in the arrangement that had existed. Why did they do so? They did so because the shopping centre was suffering difficulties and it was commercially expedient to continue the arrangement. So we would submit that come the determination of whether or not there was a repudiation, it is just simply a question of fact and not appropriate for a special leave question.

GLEESON CJ: Thank you, Mr Lindsay.

MR LINDSAY: Thank you.

GLEESON CJ: Mr West, you are not in bad shape in relation to the construction argument, but I am looking at your draft notice of appeal. If we took the view that there is not sufficient cause for us to take another look at this repudiation question on which you have lost all along the line, we could do that simply be deleting paragraph 2 of the draft notice of appeal, could we not?

MR WEST: Yes, you could, your Honour.

GLEESON CJ: Is there anything further you want to say about that?

MR WEST: No, your Honour.

GUMMOW J: Would the deletion of 2 be enough to – what would be left?

GLEESON CJ: It is the one that is intended to raise a construction point, is it not?

MR WEST: It raises that construction point, your Honour. Item 2 on page 160 is the repudiation question and then allied to that would be 3(a) insofar as it refers to repudiation. That would be the only amendment necessary, in our - - -

GUMMOW J: We would have to take out “and repudiated the lease”, would we not, under 3(a)?

MR WEST: Yes, I am sorry, your Honour would.

GLEESON CJ: All right. In this matter there will be a grant of special leave to appeal but not in respect to the repudiation question and we believe, as at present advised, that that consequence could be reflected by your client, Mr West, filing a notice of appeal in the form proposed on pages 159 to 161 of the application book but deleting from that the present paragraph 2 and so much of the present paragraph 3(a) as consists of the words “and repudiated the lease”.

MR WEST: If the Court pleases.

AT 10.25 AM THE MATTER WAS CONCLUDED