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Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [ 2008] HCATrans 266  (1 August 2008)

Last Updated: 11 August 2008

 [2008] HCATrans 266 

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M31 of 2008

B e t w e e n -

TABCORP HOLDINGS LTD

Applicant

and

BOWEN INVESTMENTS PTY LTD

Respondent

Application for special leave to appeal

GLEESON CJ
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 1 AUGUST 2008, AT 11.22 AM

Copyright in the High Court of Australia

MR N.J. YOUNG, QC: May it please the Court, I appear with MR C.C. MACAULAY, SC and MR E. WOODWARD for the applicant. (instructed by Mallesons Stephen Jaques)

MR M.J. COLBRAN, QC: If the Court pleases, I appear with my learned friend, MR T.D. BEST, for the respondent. (instructed by Scanlan Carroll Business Lawyers)

GLEESON CJ: Mr Young, I think the Registrar notified the solicitors for the parties that I have a modest parcel of shares in your client.

MR YOUNG: Yes, your Honour. Yes, we were pleased to see that, your Honour.

GLEESON CJ: I was not complaining about it or asking for sympathy.

MR YOUNG: Yes. If the Court pleases, there are, in our submissions, three reasons for the grant of special leave to appeal. Two of them concern the rule in Joyner v Weeks. The first is that Joyner should no longer be regarded as good law in Australia because it is an anomalous common law rule productive of injustice. The second question concerns the scope of the Joyner rule; did it in fact apply to the covenant not to make alterations without approval in clause 2.13 and, further, in what circumstances would the rule be displaced?

The third question concerns the interests of justice. It is our case that the Full Court exceeded its proper function and role and denied procedural fairness in raising points for the first time on appeal and disposing of the case on that basis when they had never previously been contended for.

GLEESON CJ: What was the point of departure between Justice Rares in the Full Court and the other members of the Full Court?

MR YOUNG: I think one of emphasis rather than substance, your Honour. Justice Rares construed the package of clauses, clauses 2.10 to 2.13, as amounting to a covenant to make good. His Honour seems to have assumed that the Joyner rule applies to a covenant to make good, rather than the different reinstatement rule. Thirdly, his Honour focused heavily on the role of personal preference in an assessment of reasonableness. So there were those differences of emphasis, your Honour, but fundamentally, in our submission, there is not any major point of departure.

CRENNAN J: I think he recognised, did he not, that the rule was – he described it as anomalous, as you have just done, but regarded himself as bound.

MR YOUNG: Yes, your Honour. Justice Rares regarded it as beyond his province to pass upon the question whether Joyner should be regarded any longer as good law, leaving that effectively for this Court. In addition, his Honour noted the fact that statute in several States had modified the application for common law rule by effectively limiting Joyner so that damages could never exceed the value of the diminution to the reversion.

In Victoria there is no such statute, nor is there any such statute in Western Australia, South Australia or Tasmania. So the unmodified common law rule at issue in this case is a prevailing rule in those other States as well, whereas in New South Wales , Northern Territory and Queensland the injustice of the common law rule has been mitigated by statute by overlaying a limit. You can get the cost of repairs, but not in circumstances where the cost of repairs would exceed the damage to the reversion.

The Joyner rule I have effectively just described. It though draws a distinction between an action brought at or near termination of the lease and an action brought during the lease. When the action is brought at or near termination of the lease, the rule in Joyner says the prima facie measure of loss is the cost of repairs necessary to address the disrepair in which the premises had been left at the end of the lease, whereas if the action is brought on a covenant to maintain or keep in repair during the course of the tenancy, then damages are measured by the diminution in value. That different approach was criticised by a law reform commission in New Zealand as anomalous, and it surely is.

GLEESON CJ: What is it that you would invite the Court to substitute for the rule in Joyner?

MR YOUNG: We would invite the Court to substitute the general common law rule that applies to reinstatement covenants and, likewise, to all contractual provisions. It is discussed in the High Court in Bellgrove and by the House of Lords in Ruxley. Essentially you apply the Robinson v Harman general rule concerning contractual damages, placing the wrong party in the position the wrong party would have been in had the contract been performed but with a rider, that you do not do that where reinstatement or repair would be unreasonable and exceed the true measure of loss. That is the rule for reinstatement covenants.

It is the rule for general contractual damages, as the House of Lords has said in a building case and as this Court said in Bellgrove in a building case. In our submission, that rule should apply generally to all covenants which are breached in leases. There should be no anomalous special rule of the kind enunciated in Joyner that applies only to covenants to repair and only when the breach occurs at or near the termination of the lease. That anomaly is productive of injustice as this case, in our submission, demonstrates.

The members of the Full Court effectively found that there was in this case, confirming what the trial judge had found, that there was a breach of clause 2.13 not to make alterations without approval. They assimilated that or equated it to a breach of the covenant to repair. Their Honours said that Joyner applied to repair covenants and, they said, it also applied to make-good covenants. That is paragraph 7 and 13 of the joint judgment and it is also paragraph 84 of Justice Rares. But on the other hand, and it is hard to see what the distinction is, their Honours accepted that if it is a covenant to reinstate, a different rule altogether applies. What exactly the difference is between a reinstatement covenant and a make-good covenant is never explained.

Can I go to the joint judgment and point to the passages. Repair covenants are dealt with in paragraph 9, application book page 65, and also the first sentence of paragraph 10. That is to be contrasted with paragraph 15 at page 67 dealing with reinstatement covenants. The Court will see at paragraph 15:

the court must determine: (a) what loss the landlord suffered and what damages are necessary to place the landlord in the same position as if the contract had been performed; and (b) where the cost of reinstatement is claimed, whether the insistence on reinstatement is reasonable –

That is the general contractual rule in Bellgrove and Ruxley. As we pointed out in our written submission, Joyner has been criticised in texts and in cases and in Law Reform Commission reports. It has been mitigated by statute in some States and not others. The fact that it has not been mitigated in Victoria and certain other States is no reason why this Court should refrain from addressing an anomalous and unjust rule enunciated by the common law more than a century ago. It is a common law rule at the end of the day.

GLEESON CJ: How do you say it operated unjustly in this case?

MR YOUNG: At several levels, your Honour. First, the court equated a breach of clause 2.13 not to alter without approval with a breach of a repair covenant. That was never pleaded at trial. The case was never run that way and it was raised - that is the possibility that there was a breach of the repair covenant – the first time by the members of the Full Court.

Secondly, Joyner, at least as enunciated by the Full Court, imposes an onus on the lessee to prove unreasonableness under a proviso to Joyner. The case was run at trial as if the reinstatement measure of damages applied and then it was for the lessor on those cases to discharge the onus of proving reasonableness. So, effectively, the shift of focus to Joyner meant that the onus that everybody had accepted and addressed at trial was reversed by invoking Joyner. Then the lessee is criticised for not having cross-examined a witness about reasonableness. There was no need to cross-examine because of the onus that existed that fell on the lessor.

CRENNAN J: Is it possible to raise the Joyner v Weeks point without also raising this procedural fairness point? Is it possible to ventilate the Joyner v Weeks point without - - -

MR YOUNG: They are interrelated, your Honour, for these reasons. Assuming Joyner applied - it says prima facie cost of repairs but there is a proviso – provided that there is no other circumstances that make that unreasonable, being circumstances affecting the relation of the lessor and the lessee, that is the proviso articulated in Joyner itself. The proviso was modified, in New Zealand at least, in the Maori Trustee Case to say, provided that in the short and long term the lessee establishes that it would be unreasonable.

What the Full Court did was to say, effectively, Joyner is the applicable provision because we apply it across to clause 2.13, but Joyner on the judge’s factual findings would not produce any different result. The reason was said to lie in the 2006 agreement to extend the term of the lease. This is paragraph 24 of the joint judgment. The Court will see there is a reference at about point 4 of the page to the facts found by the trial judge, namely, there was ongoing occupation until 2012 and 2017 and then the foyer would require refurbishment in any event. Their Honours said:

Those facts . . . would ordinarily be taken into account when deciding whether the Joyner v Weeks method should be displaced. But in this case . . . damages must be assessed in an artificial environment – a notional world –

because of a provision of the 2006 agreement. So to answer your Honour’s question, Joyner v Weeks is said to apply. It would not produce any different result on the factual findings of the trial judge which are not questioned, but then those factual findings are disregarded on the grounds that there was a condition requiring that damages be assessed artificially. So it is not possible to disentangle the Joyner, the question of principle, from the issues of procedural fairness because they go to the raising for the first time in the Court of Appeal, the Full Court, of both 2.13 and Joyner and the effect of the 2006 agreement. Those are the procedural fairness issues.

It is said against us that Joyner was referred to with approval by the High Court in 1943 in Graham. Graham was in fact a case addressing section 133A of the Conveyancing Act (NSW) which had mitigated Joyner. It was also a case where the hotel was left in disrepair, without any lavatories, not complying with liquor licensing laws. It was not a case where the foyer was replaced with a new effective foyer, but here the lessor was quite happy to keep, indeed, took the benefit of it by extending the lease and altering the terms of the lease for another 10 years or so.

The outcome, in our submission, is unjust. Can I refer the Court to what Justice Tracey said, for a moment, at trial in the application book at page 30, paragraph 68, last sentence – his Honour’s factual findings are at page 42, paragraphs 91 and 93 – effectively that the reality of the situation was there was ongoing occupation, both parties took, effectively, the benefit of the altered foyer, and at the end of the extended lease, it was going to have to be refurbished in any event. Those facts plus the procedural fairness matters suggest that this is a case where there has been a miscarriage of justice. If Joyner is a relevant principle, which of course we would be disputing in the appeal, there are issues as to its scope. Does it apply to a covenant not to make alterations without approval?

GLEESON CJ: A substantial part of the damages awarded included interest, did they not?

MR YOUNG: Lost rent, your Honour, for a notional period of being out of occupation while the premises are refurbished.

GLEESON CJ: That is what I am trying to understand. What refurbishment?

MR YOUNG: An assumed refurbishment that would have occurred at the point of time at which the lease was extended. The Full Court pointed out that when the lease was extended in 2006, technically under landlord and tenant law an extension of the term of the lease is effectively a surrender and regrant. The Full Court proceeded on the basis that there was, therefore, a technical termination of the lease, although in reality occupation was continuous in 2006. That attracted the Joyner rule. Therefore, you assessed damages notionally as if there had been a termination of the lease in 2006 and the damages were broken into two parts by way of assessment; the cost of the repairs plus the loss of rent during the period of four months whilst the notional restoration took place.

GLEESON CJ: That is the part that I am asking about.

MR YOUNG: Yes, your Honour.

GLEESON CJ: Is that required by Joyner?

MR YOUNG: I think there are cases following Joyner that would extend that far, yes, your Honour.

GLEESON CJ: But this was a case in which it was known that there would no refurbishment until 2012 at least, perhaps 2017, and then it was going to have to happen at the expense of your client. Is that right?

MR YOUNG: No, that depends on how you assess damages for breach of the covenant not to make the alterations without approval. If it is the diminution in the value of the reversion, there would be no damages because there would be no loss of value except a sum of $33,000 because the foyer reduced the letable area by a small amount. But if damages are the cost of repairs at the end of the lease in 2012 or 2017 and you are applying Joyner, then presumably the measure would be the cost of repairs plus any loss of rent during the period of repair. So it comes back to the same issue, your Honour; what is the principle that applies to the measure of damages in this situation?

The other issue about applying Joyner, assuming it applies, that might have to be addressed is, as I said, Joyner is subject to a proviso. It can be displaced if there are matters making it unjust to apply the rule. The proviso to Joyner did not cast any onus on the lessee. The proviso was recast in New Zealand, casting an onus on the lessee to prove that repairs would be unreasonable.

GLEESON CJ: Why do questions of onus matter in a case like this? The facts are all known, are they not?

MR YOUNG: Yes, onus should not matter, your Honour, but it mattered here because of the late raising. The trial was conducted on the basis that the plaintiff had to prove all elements of loss. Applying Joyner in the way enunciated by the High Court effectively reversed the onus.

The other issue that I have not really referred to concerns the 2006 agreement. It was raised for the first time as an issue bearing upon the termination of the lease. In the Court of Appeal it was never relied upon or pleaded by the landlord. The court adopted a construction of the 2006 agreement which, in our submission, is improbable. That construction was never advanced by the landlord and the construction was never even articulated during the course of argument in the Full Court, although the relevance of the special condition was discussed.

The effect of the construction adopted of the special condition was that the Court said damages were to be assessed ignoring the fact of continuing occupation, ignoring the fact of no diminution in the value of the reversion and ignoring the fact that the refurbishment would have to be carried out anyway at the end of the lease.

CRENNAN J: This was their artificial environment point?

MR YOUNG: Yes. For those reasons, it is our submission, if the Court pleases, that this case does raise important questions of principle, questions of general importance and the case also raises serious issues going to the interests of the administration of justice. If your Honour pleases.

GLEESON CJ: Yes, Mr Colbran.

MR COLBRAN: If the Court pleases. Tabcorp did not, your Honours, object either before the trial judge or in the Full Court to the reception of evidence of the 2006 heads of agreement. The impact of that agreement was ventilated before Justice Tracey and the clause which was negotiated for in the lead up to the trial when the new lease was executed was designed for the very purpose identified by Justice Rares at paragraphs 73 to 76. It was a part of the submissions made to the trial judge that the lease, the earlier lease, came to an end and at this point in time crystallised the rights which Bowen would have.

Not only was that a matter put to Justice Tracey and accepted by his Honour only in a limited sense where he accepts that a new lease came into existence and terminated the old one, but it was the subject matter of a notice of appeal to the Full Federal Court, Paragraphs 4(b) and 5(b) of the notice of appeal in application book page 57 disclosed reliance on that very fact.

So it is not quite right, with respect, to say that Tabcorp was taken completely by surprise by the 2006 agreement. There was no objection to its reception. It is obviously correct that the construction of that agreement is important in the determination of this case. It is important in a number of ways, as the joint judgment of the majority identified and as Justice Rares identified. It is important not only because of the effect of the Joyner v Weeks line of cases, but also because of its impact on other causes of action that were relied upon but never fully investigated by the Full Court.

GLEESON CJ: What do you understand to be the reason for the difference between the orders proposed by Justice Rares and the orders of the others?

MR COLBRAN: The difference in the orders. Well, I think there are two, with respect. The first is that his Honour indicated that it might be desirable for the parties to make submissions about the time at which damages should be assessed. That is because there was a question which was not resolved as to whether the original lease, which expired I think on 31 January 2007, fixed the time for such assessment or, rather, whether in equity the execution slightly earlier, I think nine months earlier, of the heads of agreement should have amounted to a deemed termination of the earlier lease. So that was a question upon which his Honour suggested there should be submissions.

As to other matters, it was certainly suggested during the hearing of the appeal that there may be some benefit in further submissions being made about relief. That was partly because of the recognition and frankly we accept that we did not draw attention to clause 2.10 before the trial judge. There is no escaping that. Nobody did. Although the learned trial judge did draw attention to some other clause of the lease, he did not focus on that one. But the fact is that clause 2.10 was not identified but by the time we got to the Full Court it had been identified by the court right at the very beginning of the hearing in the course of the morning of the first day.

Again, I might say, there was no objection taken to the court approaching the matter having regard to what the lease actually provided. But there was the suggestion that this might lead to a more complex outcome for the case which might involve, for example, amendments and reviewing clause 2.10 and so forth. Maybe that is what his Honour had in mind. That I can say certainly about the 2006, 2007 agreement.

So we say, with respect, that the natural justice point of view really does not take our learned friends far enough because the material was before the trial judge. The importance of the construction of that clause was relevant before the trial judge and there was no objection taken to the reception of the material. In fact, at the trial our learned friend’s joined in the submission that the evidence should be received.

So far as Joyner v Weeks is concerned, we acknowledge that the rule may be described as anomalous in some respects. I think there are a number of respects in which that observation can be made and they are all probably capable of some historical explanation, but that does not mean to say that there is not an anomaly in the rule now. The question is what this Court should do about it given that in the United Kingdom and in some Australian States the legislature has intervened? If this Court were to take a step to intervene to overrule or overturn the effect of Joyner v Weeks, that may resolve some anomalies, but it would not actually bring coherence because that would still not lead to the same approach being adopted in those States where there is legislation and in the other States.

It is, if I may submit, a paradigm example of the sort of problem which, if it is regarded as a problem, should be solved by the legislature and not by this Court. I say that for a further reason. The legislature provides a more appropriate instrument for addressing this aspect of the law if it is felt in need of being addressed. That is because parties who currently are enjoying commercial leases have regulated their affairs in Victoria in accordance with a certain understanding. Disputes may arise in relation to those matters. It is more appropriate for the legislature to provide the explicit way of dealing with those matters prospectively, rather than being dealt with in this Court.

CRENNAN J: As against that I suppose there have been developments in the common law, as in Bellgrove’s Case, in relation to the measure of damages in building and land matters reflecting more closely general approach to contract.

MR COLBRAN: Certainly.

CRENNAN J: So it is difficult to say it would only be the province of the legislature having granted those sorts of developments.

MR COLBRAN: I see, yes. What I had in mind was that it is more appropriate for the legislature to intervene in a situation where there is such a settled rule which has been relied upon by many people for so long. There can be variations made, but it is hardly an argument for consistency to create further and unknown inconsistencies into the future, which is what would occur if the High Court were to intervene in this way when there is already legislation dealing with the matter in other places.

In terms of the justice of the case, your Honours will have read the explanation of the history of the matter in the judgment of Justice Rares, but is submitted that, as his Honour said, there is really nothing at all unreasonable about holding Tabcorp to the agreement that they had made. His Honour says at page 105 of the application book:

There does not seem to be any good reason in principle why, when Tabcorp had to resort to such a significant alteration of the demised premises, in breach of its lease, the Court should take the view that this the radical change should be forced upon the party not in default.

The Court will recall what occurred in this case is that quite deliberately with knowledge of the requirements of the lease and surreptitiously after arranging a meeting for the following Monday the bulldozers, or at least the
jackhammers, were brought in and the foyer which had been constructed with such care and dedication was jackhammered out. There is a point at which, with respect, Joyner v Weeks and cases of that kind reinforce the requirement or reinforce the laws concerned to ensure that tenants do not act in contumelious disregard of their obligation. As a matter of justice, with respect, we are left with a foyer which is inconsistent with the contract which we had made and which, in our submission, we are entitled to have restored.

Your Honour the Chief Justice asked about the time and why there should be an allowance of damages for rent paid during the period of restoration. If it was the case, your Honours, that the obligation of Tabcorp was to repair and to yield up in good repair at the end of the second lease, if they accepted that, then there would not have been any need for this litigation. It is, as we have submitted to the Full Court, nothing like a case about obtaining money inappropriately or as a windfall. The consistent desire of my clients has been to have the foyer which they had originally had.

In any event, it is respectfully submitted this is an inappropriate case for special leave. In relation to the procedural arguments, it is inappropriate because objection was not taken to these points at the relevant time and will, in any event, if upheld, involve the matter being returned to the Full Court and possibly to the trial judge because it is not appropriate, in our respectful submission, for the matter to be determined as if there was not a Joyner v Weeks line of authority, as if there was not a clause 2.10, which we did not rely on and still do not rely on directly, but which informs and illuminates the obligations under clause 2.13.

Once these things have been identified, they cannot be ignored. It is not, in our respectful submission, as I have said, an appropriate case for the Court to reconsider Joyner v Weeks and that is a matter best left to the legislature and, in any event, the justice of the case here would suggest that this is not the appropriate vehicle with which to explore Joyner v Weeks. If the Court pleases.

GLEESON CJ: Thank you, Mr Colbran. Yes, Mr Young.

MR YOUNG: There are several points by way of reply. First, our learned friend submitted that no objection was taken to the reception, that is to say, the admission into evidence of the 2006 agreement. That is so. That is because, at a general level, the relevance of the agreement was only to explain the transition from the first lease to the extended lease. There was no new lease. The continuing term was only explicable by reference to the 2006 agreement. That in fact was the only reference to it by Justice Tracey, page 26 of the application book, paragraph 53. That is quite different than
the use made of it by the Full Court, which was to say it required, by a particular construction of the special condition, that damages be assessed notionally or artificially and in disregard of the real facts. Secondly, there was an objection in the Full Court to the attempt to rely upon clause 2.10 and also to the assessment of damages as at the assumed date of surrender of the lease.

In our submission, what our learned friend’s submissions did not address is that Joyner was not relied upon below, hence there was no issue about clause 2.10. A breach of clause 2.10 was not pleaded and the meaning, in effect, of the 2006 agreement in relation to the special condition was not in issue. The only breach alleged was 2.13. Indeed, there was a case of rectification to try and insert a make-good clause.

Next my learned friend referred to legislation in other States and made a submission that this should be left to the legislature. As Justice Rares points out in his judgment at paragraphs 81 to 82, the limitation imposed by statute in certain States reflects the general common law principle. Our argument would be that Joyner should be reformed in the other States to bring it in line with general common law principles concerning damages, which is exactly what the legislation has done in certain states. So that, in our submission, involves no real objection of substance.

As to the justice of the case, the purpose of damages is not to punish; it is to compensate. When our learned friend says that the breaches were deliberate in this case, that is not disputed. The issue is simply, what are the correct principles governing the assessment of damages for the clause that was allegedly breached, 2.13? We accept there was a breach. We accept it was deliberate if that is relevant, but the question is how should damages be assessed? If the Court pleases.

GLEESON CJ: Thank you. In this matter there will be a grant of special leave to appeal.

AT 12.01 PM THE MATTER WAS CONCLUDED