McPhee; Luxer Holdings Pty Ltd v Glentham Pty Ltd & Anor [2008] HCATrans 158 (18 April 2008)

Last Updated: 29 April 2008

[2008] HCATrans 158

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Perth No P44 of 2007

B e t w e e n -

MICHAEL JOHN McPHEE

Applicant

and

GLENTHAM PTY LTD

First Respondent

LUXER HOLDINGS PTY LTD

Second Respondent

Office of the Registry
Perth No P47 of 2007

B e t w e e n -

LUXER HOLDINGS PTY LTD

Applicant

and

GLENTHAM PTY LTD

First Respondent

MICHAEL JOHN McPHEE

Second Respondent

Applications for special leave to appeal

KIRBY J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 18 APRIL 2008, AT 12.44 PM

Copyright in the High Court of Australia

__________________

MR J.J.J. GARNSEY, QC: May it please the Court, I appear with my learned friend, MR R.J.L. McCORMACK, for the applicant in each of those applications. (instructed by Stables Scott)

MR M.C. HOTCHKIN: May it please the Court, I appear for the first respondent in each of those applications. (instructed by Hotchkin Hanly)

MR GARNSEY: Submitting appearances have been filed for the respective second respondents in those applications.

KIRBY J: Yes, thank you very much, Mr Garnsey.

MR GARNSEY: Your Honours, these two applications are brought from a judgment of the Court of Appeal of Western Australia. In relation to the first matter, concerning the liability on the guarantee, of which Mr McPhee was the guarantor, the court reasons were unanimous in that Justice Wheeler and Acting Justice Heenan agreed with Justice Buss, who delivered the principal judgment. In relation to the application of Luxer Holdings, which concerned the assessment of damages for termination of a lease for repudiation of a lease and acceptance of that repudiation, Justice Wheeler agreed with Justice Buss and Justice Heenan delivered separate reasons.

As to the guarantee, or indeed in relation to both matters, we respectfully submit the court fell into significant error in a number of respects and some of those raise matters of general importance. In relation to the guarantee, that is found at page 79 of the application book, lines 30 to 50. It was a clause in the same document as contained the lease. Your Honours will see that it was a guarantee – four lines down to:

the due and punctual payment by the Lessee of the rent reserved by and the performance and observance by the Lessee of the covenants . . . during the term hereby granted and any extension or renewal thereof upon the following terms and conditions –

and (a) and (b) are relevant to the judgment:

(a) if and whenever any instalment of the rent or any part thereof is in arrears or unpaid for the space of one (1) month after it has become due and payable the Guarantor will upon demand pay the same to the Lessor;

(b) if and whenever there is a breach by the Lessee of any of the covenants, conditions or stipulations herein contained the Guarantor will upon the written request of the Lessor cause the breach to be remedied . . . and pay to the Lessor all losses, damages, expenses and costs which the Lessor is entitled to recover -

The court, in the reasons for judgment of Justice Buss, simply ignored those conditions precedent to liability and, further, any demand which was given was given after termination of the lease. The lease was terminated on 4 April 1996; that is uncontested. There was a letter given later in 1996 and then one given in 2001, which is annexed to the summary of argument in this matter.

The first question which arises, and we submit it is of general importance, is whether notice can be given after the lease has been terminated in the light of the provisions of this clause, which is not an unusual clause, and of course guarantees are one of the most usual forms of security.

KIRBY J: Is that not a problem though? When you concede that it is a rather unusual clause, why should this Court expend its efforts to try to second-guess the decision of the judges below?

MR GARNSEY: I am sorry, your Honour, I thought I said the opposite. It was not an unusual clause.

KIRBY J: I see.

MR GARNSEY: I certainly would not say it was an unusual clause, if your Honour pleases. But what it does make clear is that the guarantor’s liability is subject to conditions precedent which relevantly here are found in (a) and (b). It was also accepted by the plaintiff that it had to establish that the conditions precedent in clause 6 had been satisfied.

HAYNE J: Where do we most conveniently find what you say is the Court of Appeal’s error in this regard?

MR GARNSEY: One finds it in the judgment of Justice Buss at page 81, lines 33 to 50. If I could turn, first, back to page - - -

KIRBY J: In paragraph 82, is it?

MR GARNSEY: Yes. That is where his Honour commences. First, in paragraph 81 his Honour sets out his Honour’s conclusions, having referred to the decision of the House of Lords in Moschi’s Case and Sunbird Plaza. There is a categorisation of the types of guarantee of two sorts in Moschi’s Case. The passage did not refer to conditions precedent and his Honour seems to have taken that categorisation and said if it falls within the relevant limb in Moschi’s Case one does not have to worry about the conditions precedent. In paragraph 81 of the judgment on page 81 of the appeal book, lines 10 to 20, his Honour summarised clause 6 incorrectly as comprising two limbs:

(a) first, a guarantee of the ‘payment’ by Luxer of the rent; and

(b) secondly, a guarantee of the ‘performance and observance’ by Luxer of the covenants -

Then in 83 – and I will come back to 82 on a different ground – his Honour says:

To the extent that the guarantee was of the ‘payment’ of the rent, Mr McPhee was required to pay the rent to Glentham if Luxer failed to pay it. The relevant provision of cl 6 is based on the assumption that Luxer is under a continuing obligation to pay the rent to Glentham.

His Honour does not refer to any demand for rent as being a precondition and, secondly, his Honour says:

The relevant provision of cl 6 is based on the assumption that Luxer is under a continuing obligation to pay the rent to Glentham.

That is a matter which can be the subject of considerable argument if the lease has been terminated. Then at paragraph 84 his Honour says:

To the extent that the guarantee was of the ‘performance and observance’ of Luxer’s covenants . . . the guarantee was an undertaking by Mr McPhee that Luxer would carry out its obligations under the lease –

referring to one of the categories in Moschi’s Case. His Honour then says:

Luxer’s failure to perform and observe those obligations constituted a breach by Mr McPhee of his promise under the relevant provision of cl 6.

That is incorrect because there is no breach under clause 6(b), which is what his Honour is referring to, unless a written request is made that the breach be remedied within a reasonable time. Over the page his Honour completes his and the court’s consideration of this matter by referring, or at least stating the conclusion. We say there is a manifest error there and in relation to 6(b) it is almost unarguable that it is not an error and, in view of the commonality of this type of clause and the importance of the guarantee as a security, it is a matter in respect of which leave should be granted.

The summary of argument, found at page 121 of the application book, refers to the well-known authorities, that a guarantee must be construed strictissimi juris, in a sense contra proferentum, because the guarantor may or may not be involved in the dealings between the party guaranteed and the third party and he is, in a sense, at their mercy. He is, in a sense, a contractual hostage.

KIRBY J: That is the whole point of giving a guarantee.

MR GARNSEY: Yes, but if the guarantee – and it is the whole point - - -

KIRBY J: It is the contract to be construed strictissimi juris and that can sometimes lead to very considerable burdens on guarantors, but that is the whole point.

MR GARNSEY: Yes, if your Honour pleases, but it is also the foundation of the well-established body of law that, leaving aside contractual provisions in the guarantee which prevent it, if the party guaranteed and the party with whom he is dealing vary their obligations in any way or deal in certain matters one with the other, the guarantor is discharged from liability. Where, a fortiori, the guarantee itself says, “You must have notice or demand”, we respectfully submit that that is something which must be insisted upon and when a superior court, the Court of Appeal in Western Australia, cavalierly disregards the literal provisions of a guarantee, which is in a form which is not unusual, if your Honour pleases, it is a matter which ought to be the subject of review and consideration by this Court.

That is in relation to the terminology of the guarantee. There is a more fundamental matter and that is whether notice can be given after the lease has been terminated in relation to this guarantee. The matters we rely on in respect of that are set out at the bottom of page 121 and page 122 of the appeal book in the summary of argument - - -

KIRBY J: You are appearing both for Mr McPhee and Luxer.

MR GARNSEY: Yes.

KIRBY J: And each of them is an applicant for special leave.

MR GARNSEY: Yes.

KIRBY J: Is there a possible view that could be adopted that would lead to the guarantor, Mr McPhee, gaining special leave but not Luxer?

MR GARNSEY: Yes.

KIRBY J: Or must they both travel together?

MR GARNSEY: No.

KIRBY J: And your argument about the non-attachment of the guarantee obligation is the failure to give notice as was required by paragraph (b).

MR GARNSEY: And the giving of notice in relation to paragraph (b) after the lease has been terminated. We would say that is a - - -

KIRBY J: What is the purpose of that provision to get notice before termination?

MR GARNSEY: So that the guarantor can see whether he will remedy the breach within a reasonable time, limit any liability to pay damages, if one looks at (1)(b).

KIRBY J: What do you say - - -

MR GARNSEY: If your Honour pleases, it is apparent from the reasons of the trial judge, at page 29 of the book, lines 1 to 10, that the plaintiff agreed with what I have just said. So the error of the Court of Appeal, with respect, is more egregious in this respect.

KIRBY J: Does it defy ordinary expectations that Mr McPhee, who was a principal of the firm of solicitors for whom Luxer Holdings is the service company, would not have had notice of the default on behalf of Luxer?

MR GARNSEY: No. Your Honour that is, with respect, irrelevant to the submission I am putting to your Honour. While I have not taken specific instructions as to that, I am not going to contend that he did not have notice, if your Honour pleases.

KIRBY J: Your contention is that, under clause 6(b), the notice has to be given specifically to Mr McPhee?

MR GARNSEY: Yes.

HAYNE J: Demand was made of Mr McPhee, was it not?

MR GARNSEY: Yes.

HAYNE J: It was made after the lease was terminated.

MR GARNSEY: A demand as to rent was made of Mr McPhee, that is under 6(a), after the lease was terminated. There was never any demand, we say, contrary to another finding of the trial judge, in any letter, whether in 1996 after the lease was terminated or in 2001 requiring or making a request to remedy the breach. It is a further error of the Court of Appeal that, looking at the 2001 letter, the court said, “Well, that talks about damages but it must be implied that it is a request to remedy some breach about something and so it will do in relation to (b)”.

The reason why that is important, if your Honour pleases, is this, that the lease was terminated, at the time of termination there was a particular sum of some $70,000 due in respect of rent during the period before termination – and we do not say that was not the case – there was a question at trial whether a demand was properly made in respect of that because the demand included other amounts.

But leaving that aside, in relation to the majority of the claim against Mr McPhee, which is now up to about $1.1 million, the claim, if it is good, as to damages for breach of contract upon termination of the lease, must come under (1)(b) and there was never simply any notice given, we say, but in any event it cannot under the terms of (1)(b) be given after the lease is terminated – the reason being that you cannot remedy a breach for the theoretical unexpired term of the lease after the lease has been terminated.

KIRBY J: You say the scheme of clause 6(b) is that you will be given notice of the breach in time to allow you to avoid a termination?

MR GARNSEY: Yes. Your Honour, it is not a theoretical evil that we are trying to meet. I am going to beg your Honours for a little more time because I did have two applications, but, your Honour, it is not a theoretical evil. There is a question whether there was evidence of damage by the lessor – this comes in Luxer’s application – and whether the lessor had provided evidence of damage and what the law is as to the assessment of damages and what evidence must be present. The court said, “Look, it’s quite simple. You just do it as a mathematical exercise. You take the rent over what would have been the whole term of the lease, multiply it out and that’s the amount, less any rent that the lessor has received during that period, if any”. We say that is completely wrong and wrong on the basis of statements of principle in the High Court in 1906.

HAYNE J: Can I just go back a stage because I wonder whether I am sufficiently appreciating the facts? At page 129 we have a letter, we have a letter that looks like a demand.

MR GARNSEY: Yes.

HAYNE J: A demand for the amount claimed. That was a demand made of Mr McPhee after the lease had terminated?

MR GARNSEY: Yes, 31 January 2001.

HAYNE J: I understand that. Do you say that that is not a sufficient demand because it is a demand made after the lease is at an end?

MR GARNSEY: That is one of the things we say. Secondly, it is not a demand to remedy a breach. Indeed, it could not be a demand to remedy a breach after the lease is at an end. Yet the Court of Appeal did take it as such. Your Honour, they are the first two matters really as to grounds (1) and (2). Your Honour, Justice Buss, as Mr McCormack reminds me, said at 86, lines 20 to 21:

Glentham was entitled to defer making a ‘request’ within cl 6(b) until the amount of damages it claimed was wholly ascertained.

With respect, we say that is an error, partly for the reasons I have said but also for matters in relation to Luxer’s application, which I will come to – that is, a lessor cannot wait, if a lease is terminated, and say, “I’ll just wait another five years, let it go and then see what happens and then make a claim.”

KIRBY J: The red light is on, but we will allow you a little more time, not too much, to advance anything else you have to say in the Luxer matter.

MR GARNSEY: If your Honour pleases. There is one other matter which I should just say one thing very shortly about.

KIRBY J: One sentence.

MR GARNSEY: Yes. Justice Buss, at paragraph 82, referred to an alternative basis for liability under a forfeiture clause – clause 5.3 of the lease which his Honour said that was a clause reserving the lessor power in certain events to enter and require things to be done and sue for damages.

KIRBY J: Mr Garnsey, you are getting into the great detail - this is not just a second court of appeal. This is the final Court of the nation and you have to be able to point to something that is significant. This just looks to be a matter of construing particular documents between particular parties and not attracting matters of great importance. The only issue is whether the Court of Appeal got that construction of 6(b) wrong and we are going to call on your opponent to address us on that, but - - -

MR GARNSEY: Yes, and if your Honour pleases, I was trying to finish a rather long sentence, because it is a matter of general importance. Clause 5.3 is a standard reservation of powers to lessor and forfeiture clause. Justice Buss says there is an implied obligation to pay in a lease with that sort of clause. That is a matter which has never been the subject of decision and was something that came out of Justice Buss, and he used that to base a further liability on Mr McPhee as guarantee and that, with respect, is a matter of considerable significance and general importance which, in our respectful submission, this Court should review.

In relation to the Luxer matter, your Honour, Justice Buss referred to the principles of Lamson’s Case, which is a 1906 decision of this Court, which is set out at page 63 of the judgment of Justice Buss in the application book in a citation from Sir Gerard Brennan in Progressive Mailing House, a case which did not, as an issue, require the determination of how damages were to be determined in the amount when a lease was terminated.

A passage from the judgment of Chief Justice Griffith in Lamson’s Case is set out there, which we say is correct, but it makes it quite clear that there must be evidence of the value of the lease which has been terminated at the time of termination and then the court discusses a number of cases and at 65 his Honour falls into error, which seems later to have been restored as a statement of legal principle. At page 65, lines 25 to 35, his Honour says:

Where the trial of the lessor’s action against the lessee occurs after the term of the lease would otherwise have expired

that is here –

the normal measure of damages is the total rent and outgoings etc . . . less any amount the lessor has obtained as profits –

that.....the statement of principle in the passage of Sir Samuel Griffith:

less such sum as a jury may think he is likely to derive as profits from the use of the land during the residue of the term -

At the end of the day, Justice Buss, with whom Justice Wheeler agreed, said it was a simple mathematical calculation; you just multiply the rent out and you take off any rent which might have been received in the process. Justice Heenan, who adopted a somewhat different approach, we say made two errors of principle: first, his Honour used mitigation to supplement a gap in the plaintiff’s evidence, that is, lack of evidence of value at the time of termination and, secondly, his Honour mistook the principles governed by the decision of this Court 101 years ago in Lamson’s Case, referring to it at page 99, lines 40 to 50, as a comparable case, justifying the multiplication exercise that I have just indicated to your Honour.

That was not the case. Lamson’s Case was directly to the contrary. Lamson’s Case was a lease of patents and it was on the construction of the lease found to be that the rental was payable in toto with an allowance that it might be paid annually but, in the event of default, the whole rental fell due as a matter of construction of the relevant lease.

So the matter of principle in Lamson’s Case has been, in this decision of the Court of Appeal, not only misapplied but misunderstood and the error of the court will enable lessors to stand back, wait as long as they want, they will be relieved of the obligation to prove their damages at the time of termination and the lessee, or defaulting lessee, will be obliged to rely on repudiation. In other words, the onus of proof is reversed by this decision. Instead of the plaintiff having to prove damages, the respondent, or defendant, in fact has to prove that the plaintiff has not suffered damage.

We say that is fundamentally wrong. It is contrary to the decision of this Court 101 years ago, cited by Sir Gerard Brennan with approval in
Progressive Mailing, and is a matter which should be reviewed by this Court.

KIRBY J: Yes, I think you have said that now.

MR GARNSEY: If your Honour pleases.

KIRBY J: We understand that submission. Thank you very much.

MR GARNSEY: Your Honour, I thank your Honours for the indulgence for the extra time.

KIRBY J: Mr Hotchkin, we need your assistance on the application by Mr McPhee, the application in relation to the guarantee. So what do you say in relation to the criticism of the Court of Appeal’s interpretation of clause 6(b)?

MR HOTCHKIN: Your Honour, my learned friend, I think, said that his Honour Justice Buss ignored the conditions precedent and my learned friend referred your Honours, under a question from your Honour Justice Hayne, to page 81. With respect, you will not find the way in which his Honour dealt with the matter at that page; you will find it at page 83. At page 83 his Honour deals with ground 2(b) which asserted, in the grounds before the Court of Appeal, the question: was the demand invalid in that it was not served until after the 1995 lease had been terminated, and thereunder his Honour gives some detailed reasons about paragraph 6(b).

The argument as it was run before his Honour, before the Court of Appeal, was that there was a term to be implied that the notice was required to be served before notice of termination. As his Honour observed, the clause does not say it. The only way in which it can be found is by implying it. There are a number of difficulties with that implication and his Honour has not only dealt with that himself, but also adopted the reasoning of his Honour Justice Le Miere at first instance, and one can find - - -

HAYNE J: It is now said not that implication is necessary; the emphasis now given is to whether there was a demand to remedy the default. That seemed to me to require, one, identifying the relevant default and, secondly, identifying whether there was a demand to remedy that default. What do you say as to those matters?

MR HOTCHKIN: His Honour did both. His Honour can be found at page 81 to identify the condition, or the implied conditions, requiring payment of damages and his Honour refers to - - -

HAYNE J: It is not an implied condition about payment of damages; it is an explicit covenant to pay.

MR HOTCHKIN: Yes, that is correct. The way in which his Honour addressed implied condition was by saying that was essentially the concomitant obligation of the entitlement to be paid damages. That is referred to in clause 5.3.

HAYNE J: No, in paragraph 82 you have this last sentence about “impliedly promised”.

MR HOTCHKIN: Yes.

HAYNE J: With respect, it would seem to me that that is an unnecessary addition. Clause 5.3 either operates according to its terms or it does not, and according to its terms it says, “If there’s forfeiture, you’ll pay”.

MR HOTCHKIN: Yes. Well, he is entitled to recover damages, and his Honour was simply just saying, following on from paragraph 3, but referring back to that in paragraph 84:

To the extent that the guarantee was of the ‘performance and observance’ of Luxer’s covenants . . . the guarantee was an undertaking by Mr McPhee that Luxer would carry out its obligations under the lease. Luxer’s failure to perform and observe those obligations constituted a breach by Mr McPhee of his promise under the relevant provision of cl 6. Further, Mr McPhee’s undertaking that Luxer would perform and observe its obligations under the lease extended to Luxer’s implied promise to pay the damages –

and that implied promise is simply the other side of the coin of the obligation to pay damages. In other words, the way clause 5.3 reads is that Glentham is entitled to be paid damages. Well, who is going to paying it? Luxer. So that is all that his Honour is saying about that.

HAYNE J: The demand at page 129 of the application book is a demand to pay the amount otherwise owing by Luxer as damages consequent upon forfeiture.

MR HOTCHKIN: Correct. With respect, his Honour made a finding, or accepted the finding of his Honour Justice Le Miere, that that letter constituted an approach request under clause 6(b).

KIRBY J: Yes, we do not need any further assistance, Mr Hotchkin. Anything in reply to those points, Mr Garnsey?

MR GARNSEY: If your Honour pleases, only that the Court of Appeal expressly based its reasoning in relation to 5.3(b) upon the necessity to imply a positive obligation to pay, 5.3(b) merely being a reservation of powers to the lessor. Secondly, in relation to that, the phrase “damages for the loss of the benefits” just raises the same problems as damages, which under 6(b) are in relation to first a notice requiring rectification of a breach and, secondly, then there is only an obligation to pay after that notice has been given, after the guarantor has decided whether or not to rectify the breach or to expose himself to liability for damages. There cannot be a notice after termination, we say, which preserves a remedy within the term of the lease because the lease is, by definition, at an end. If your Honours please.

KIRBY J: Thank you, Mr Garnsey.

These two applications have been heard together. They concern a dispute between the applicants and the first respondent (respectively the lessee and guarantor of a lease agreement) and the lessor respondent by a service company for a firm of solicitors of which the guarantor, Mr McPhee, is a principal.

The lessor sued the lessee and guarantor claiming to recover loss of bargain damages for repudiation of the lease by the lessee. Such damages were calculated at trial in the Supreme Court of Western Australia by Justice Le Miere with consequential orders against both applicants. The Court of Appeal unanimously dismissed the two appeals that were brought to it.

The applicants seek to contest in this Court the extent of their respective liability for damages of the stated kind and the calculation of the damages payable to the lessor. We are not convinced that the applicants have demonstrated any reasonably arguable error in the conclusions finally reached by the Court of Appeal. Nor do we consider that the special leave questions propounded involve issues of general legal importance or an injustice calling for the intervention of this Court. Special leave is therefore refused and the applicants must pay the respondents’ costs.

The Court will now adjourn until 2 o’clock in eastern Australia, noon in Western Australia to continue the Perth list.

AT 1.21 PM THE MATTER WAS CONCLUDED