Cox v ZAG Investments & Anor [2021] VCC 1842 (15 December 2021)

IN THE COUNTY COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL DIVISION

Revised
Not Restricted
Suitable for Publication

CHRIS COX	Plaintiff

V

ZAG INVESTMENTS PTY LTD (ACN 132 319 209) as trustee for BALAKIS PROPERTY TRUST	First defendant
and
BILL BALAKIS	Second defendant

JUDGE:	HER HONOUR JUDGE A RYAN
WHERE HELD:	Melbourne
DATE OF HEARING:	2 and 3 September 2020, submissions filed 18 September and 12 October 2020
DATE OF JUDGMENT:	15 December 2021
CASE MAY BE CITED AS:	Cox v ZAG Investments Pty Ltd & Anor
MEDIUM NEUTRAL CITATION:	[2021] VCC 1842

Catchwords: Agreement to sell café business – whether condition of sale agreement that balance of purchase price was payable only upon the grant of a valid sublease – whether vendor required to repay the balance of purchase price paid because condition not fulfilled or due to a failure of consideration.

Cases Cited: Baltic Shipping Co v Dillon [1993] HCA 4; (1993) 176 CLR 344; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353; Emhill Pty Ltd v Bonsoc Pty Ltd (No 2) [2007] VSCA 108; Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; Mann v Paterson Constructions Pty Ltd [2019] HCA 32; Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 587; Ovidio Carrideo v The Dog Depot [2006] VSCA 6; Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68; (2001) 208 CLR 516

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr B Michael	Brixton Legal

For the Defendants	Mr J D Catlin	MCK Legal

1 This proceeding concerns the sale of a restaurant and café business known as “The Old Cop Shop” in Bell Street, Coburg. The café is named after the police station which formerly operated at the site. The plaintiff (“Cox”) bought the business in July 2016 from the first defendant (“ZAG”). The agreed price was $510,000, with a deposit of $180,000 payable upon signing and the balance of $330,000 payable thereafter.

2 Cox contends the payment of the balance of the purchase price was contingent on the grant of a sublease of the premises from which the café operated. As ZAG did not arrange the sublease, Cox claims he is entitled to be repaid the sum of $350,000^[1] as moneys had and received by way of restitution relying upon two grounds. The first ground is that there was a failure of a condition as the sublease was never granted. The second ground, which is framed in the alternative, is that there was a total failure of consideration. This was the limited basis upon which Cox sought relief. He expressly did not sue for breach of contract or claim any contractual damages.

3 For the following reasons, I was not satisfied that Cox established either of his claims. Given this, it was unnecessary to consider the raft of various defences and the set-off claim relied upon by the defendants had the claims for restitution been established.

4 Cox is a chef by trade and a qualified restaurant manager. The second defendant (“Balakis”) is a building designer and the sole director and shareholder of ZAG. Cox and Balakis have known each other for over 20 years.

5 “The Old Cop Shop Café Pty. Ltd.” (“OCSC”) was incorporated on 7 May 2014, with Balakis appointed as its director, secretary, and sole shareholder. On the same day, OCSC was appointed as trustee of a unit trust named the “Old Cop Shop Café Trust” (“OCSC Trust”).

6 On 27 June 2014, ZAG as tenant entered into a lease (“the Head Lease”) with Moreland City Council (“the Council”) as landlord under s17D of the Crown Land (Reserves) Act 1978 (“the Act”) over a heritage listed building which had previously been the Coburg Police Station located at 160-162 Bell Street, Coburg (“the Premises”). The Head Lease was for an initial term of 10 years with an option to renew for a further 5 years, and with a yearly peppercorn rent of $1.00. Under clause 12 of the Head Lease, ZAG was not permitted to assign, transfer, sublet or deal with an interest in the Premises without the prior written consent of both the Council and the minister responsible for administering the Act. Shortly after the Head Lease was entered into, the Premises were refitted at the defendants’ expense for use as a restaurant or café.

7 OCSC operated a restaurant business at the Premises under the registered business name the Old Cop Shop (“the Business”) between 1 July 2015 and 30 June 2016. Cox was working in the Business as a manager.

8 On 17 June 2016, “The Old Cop Shop Eatery Pty. Ltd.” (“OCSE”) was incorporated with Balakis as its sole director and ZAG its sole shareholder. That same day, OCSE was appointed as trustee of the “OCS Eatery Trust” (“OCSE Trust”), a unit trust made up of 550,000 units, all of which were held by ZAG. It was never explained why a new unit trust was set up or new trustee appointed, although as the plaintiff noted nothing turned on this.

9 There was some discussion about Cox going into partnership with Balakis in the Business and taking a 40 percent share. Ultimately, however, Cox and Balakis agreed that Cox would buy the Business outright. Cox’s evidence about how this came about was rather vague. He said they had negotiated a price and that he wanted to obtain a sublease of the Premises. Regrettably, Cox did not seek any legal advice before entering into the transaction to buy the Business. Cox was aware that the Business was not doing very well. He gave evidence that the purchase price agreed upon did not include anything for good will as a result of the poor performance of the Business. Cox also gave evidence that there had been no real discussions about a sublease before July 2016.^[2] For his part, Balakis said he left it to his lawyers to prepare the necessary documentation. Neither of the two men gave any clear or detailed evidence as to what was discussed between them regarding the agreement for Cox to buy the Business.

10 On 1 July 2016, Cox, ZAG, and OCSE entered into an agreement for the sale of the Business. ZAG was named as vendor in a unit sale agreement with Cox as purchaser (“the USA”). Under the USA, which was prepared by ZAG’s solicitors Livaditis & Co, ZAG was to transfer all 550,000 of the units in the OSCE Trust to Cox for a total purchase price of $510,000. Balakis gave evidence that he arrived at this price to cover his costs in setting up and outfitting the café which included spending $200,000 on a new kitchen. The purchase price was payable in two tranches. The first payment of $180,000 was paid by Cox upon signing the USA. The second payment of $330,000, being the balance, was due to be paid on 1 February 2017 (“the Balance”). Cox made a $50,000 cash payment to ZAG and Balakis towards the Balance in late 2016, and another payment of $300,000 in June 2017.^[3] There is no dispute that the sums due under the USA were paid. Cox paid $20,000 more than the balance price stipulated in the USA. This additional sum represented a separately negotiated and agreed figure of $20,000 for stock held by the Business.

11 On the same day the USA was executed, Balakis on behalf of ZAG and Cox on behalf of OSCE executed a sublease over the Premises (“the Sublease”). The Sublease identified ZAG as “Sub-Landlord”, the OCSC Trust as sub-tenant, OSCE as “Sub-Tenant to current Sub-Tenant”, and the Council as “Head Landlord”. The Council was not a party to the Sublease. The term of the Sublease was expressed as “10 Years Plus a Further term of 5 Years” from 12 May 2014, and rent was set at “$2,000.00 Per Week Plus GST and Plus outgoings”.^[4] In paragraph A of the Recitals, it is stated that a copy of the Head Lease was annexed. Cox’s evidence was that he did not see the Head Lease at the time he signed the Sublease. It appears that ZAG did not provide Cox with a copy of the Head Lease until 18 June 2018. Paragraph B of the Recitals refers to the Sub-Landlord (ZAG) having the consent of the Head Landlord to grant the Sublease. This statement was incorrect. Cox gave evidence that Balakis told him ZAG was paying $65,000 a year in rent to the Council. This was also inaccurate as the rent under the Head Lease was a peppercorn rent of $1 per annum.

12 Pursuant to the USA, Cox was appointed as a director of OSCE on 4 July 2016. Around this time, Cox took possession of the Premises and began to operate the Business, paying a monthly rent of $8,800 to ZAG. Balakis provided Cox with liquor licence transfer forms for his execution, which were subsequently submitted to the Victorian Commission for Gambling and Liquor Regulation.

13 At the time the USA was signed, the parties were proceeding on the basis that Cox’s right to occupy the Premises would be by way of a sublease. This is borne out by the fact that the parties did execute the Sublease on the same day as the USA was signed. Prior to signing, Cox provided the defendants with various documents to be submitted to the Council by the defendants for the Sublease to be approved, including a resume with employment history, several references, tax returns for 2013-2015, and a summary of assets and liabilities. Balakis agreed that he did not forward these documents to Council but said he had provided them to his lawyers. There were no documents discovered by the defendants that demonstrated these documents had been sent to the Council at or around the time Cox gave them to Balakis in 2016.

14 Clause 10.6 of the Sublease permitted the sub-landlord to further sublease the premises without the consent of the sub-tenant. Clause 10.6.2 stated: “The Sub tenant shall not sub lease any part of his tenancy with (sic) the written consent of the sub Landlord.” Presumably, the reference should have been “without” the written consent of the landlord. The Sublease is not a model of drafting, which perhaps explains the later insistence of the Council that any transfer of lease be prepared by its lawyers.

15 The difficulty with the Sublease was that neither the consent of the Council as landlord nor of the Minister had been sought by ZAG prior to execution, as was required under clause 12.1 of the Head Lease. ZAG was prohibited under that clause from assigning, transferring, sub-letting, granting any licence or sharing the possession of the Premises without the prior written consent of the Council and the Minister. Under clause 12.2, the Premises could be assigned assuming the Retail Leases Act 2003 (Vic) applied and providing various requirements which were outlined were met. Clause 8 of the executed Sublease stated inaccurately that the consent of the Council as Head Landlord had been given. The Council had not been approached by the parties before the Sublease was signed.

16 Balakis corresponded periodically with the Council regarding the potential for ZAG to enter into a sublease with Cox over the Premises from August 2016. ZAG’s solicitors sent the Council a proposed draft sublease on 8 September 2016. This draft was in slightly different terms to the one executed by the parties on 16 July 2016. The former clause 10.6, for example, was not in the unsigned draft. The commencement date was changed from 12 May 2014 to 1 July 2016. The termination dates were different. Cox was named as a guarantor but was not named as such in the Sublease. The rent stated was $104,000 per annum whereas the figure in the Sublease was $2,000 per week.

17 On 9 September 2016, the Council advised ZAG’s solicitors over the phone that if an agreement had been made to sublease the Premises without the approval or involvement of Council, this agreement would be in breach of the Head Lease. The Council sought clarification from ZAG’s solicitors about the nature of Cox’s occupation enquiring whether he was a new manager of the restaurant or a new tenant. Balakis advised Council on 12 September 2016 that Cox was the new site manager of the Premises and confirmed a sublease had not been executed. The Council officer to whom Balakis spoke then outlined the necessary steps to be undertaken for a sublease approval.

18 A meeting with Balakis and the Council took place on 22 September 2016. A file note of the meeting was made by Ms Kiely, one of the Council officers in attendance. She records that the “process involved when a tenant is seeking a sublease” was discussed at the meeting. The file note also records Balakis as saying he would continue with a “management agreement” and that he would work through this with the site manager, as he wished “to make/continue with financial decisions”. Balakis confirmed he would remain the contact for the lease and continue as lessee. The Council officers then confirmed that no further action was required regarding the proposed sublease.

19 Balakis gave evidence that he had discussions with Cox at the café about entering into a management agreement. A draft enterprise management agreement was prepared by ZAG’s solicitors naming ZAG as the principal and OCSE as manager. This document was sent to Cox’s solicitors on 5 July 2017, but it was never signed by the parties.

20 The relationship between Balakis and Cox deteriorated in the months following the execution of the USA. They engaged in various disputes arising from the provisions and performance of the USA, including the transfer of the liquor licence, Cox’s payment of the Balance, and the status of the Sublease.

21 Cox ceased paying rent to ZAG around July 2017. He did so because of his continued frustration caused by the failure of ZAG to provide him with a valid sublease. Balakis gave evidence that ZAG continued to pay Council rates, water charges, and waste charges for the Premises.

22 On 27 March 2018, ZAG commenced County Court proceedings against OSCE and Cox claiming several breaches of the USA. Both parties filed summonses in that proceeding seeking various forms of relief, which were largely addressed by a handwritten “Heads of Agreement” created by the parties’ solicitors dated 15 June 2018. The proceeding relating to those summonses was discontinued by Balakis and ZAG on 18 October 2018. Under the Heads of Agreement, ZAG agreed, inter alia, to grant a licence to OCSE to occupy the Premises at will until disposition of these proceedings at a rent of $1 per annum. It was also agreed that OCSE would pay water rates from 15 June 2018 and Balakis would register Cox as an associate under the liquor licence. It is common ground that the liquor licence for the Business held in Balakis’ name was never transferred to Cox.

23 On 24 August 2018, the Council sent an email to ZAG (addressed to Ms Kathy Balakis) setting out various defaults under the Head Lease, including the ongoing issue regarding the reassignment and occupation of the Premises without consent of the Landlord and the Minister. The Council requested a copy of the documentation evidencing the reassignment, as well as confirmation of “the current status quo and... the proposed course of action with the current occupant”.

24 On 30 August 2018, ZAG as transferor signed two transfers to enable the transfer of the remainder of the 330,000 units in the OCSE Trust and 72 shares in OCSE to Cox. The transfer forms produced in the Court Book were not signed by Cox.

25 ZAG’s present solicitors wrote to the Council by letter dated 23 October 2018 advising that settlement of the USA had not occurred and that Balakis still held 60% of the units in OCSE Trust. It was stated that Cox handled the day-to-day operations of the café. The solicitors made a formal request for assignment of the Head Lease and enclosed a proposed form of transfer of lease to Cox. The application included financials and references from Cox in support of the proposed transfer. This application was consistent with orders made by Judge Cosgrave on 18 October 2018 requiring ZAG and Balakis to lodge an application for an assignment of the Head Lease with the Council and the relevant State Minister.

26 In response to the Council’s subsequent request for a copy of the management agreement between ZAG and Cox, ZAG’s solicitors confirmed to the Council on 31 October 2018 that there was no such agreement in place. This was also stated to be the case by the plaintiff’s solicitors in an email to the Council sent the previous day. The plaintiff’s solicitors also said in this email that their client’s position was that the Council was “obliged to assign the lease on its current terms”.

27 On 8 February 2019, the Council emailed the plaintiff’s solicitors seeking updated financial statements to confirm the bona fides of Cox as a new tenant. A transfer of lease prepared by the Council’s lawyers, Maddocks, was subsequently executed by ZAG and Cox and returned to the Council. The Council met with Cox on 11 October 2019 and requested additional information from him. There was then further correspondence between the parties and Maddocks.

28 Cox gave evidence that he decided to cease trading in mid-2019 as the Business was no longer viable to operate.

29 On 13 November 2019, the Council sent Cox an email. The email referred to the meeting held with Cox and Council officers on 11 October 2019, during which Cox was asked to provide updated financial details of the café. There had been a discussion about the current operation of the café, noting that it was closed, and asking what was happening and when would it be reopened. The email requested that the information sought be provided no later than 22 November 2019.

30 As of 22 November 2019, Maddocks was still waiting upon up-to-date financial information from Cox as the proposed assignee, without which the Council was unable to progress the transfer of the Head Lease.

31 On 19 December 2019, the Council’s solicitors served a notice on ZAG pursuant to s146 of the Property Law Act 1958 referring to numerous breaches under the Head Lease. The multiple breaches identified included breaches regarding the state of repair and cleanliness of the Premises, which had been an ongoing issue. The Council also relied upon a breach of clause 12(1)(a), stating that the tenant (ZAG) had “parted with possession of the Premises without the Landlord’s consent”. On the same day, Council wrote to the defendants advising that it did not consent to the assignment of the Head Lease. The reasons given by the Council for its refusal to content to the assignment were two-fold. The first was that ZAG was in breach of the Lease by reason of the s146 notice served, contrary to the requirement under clause 12.2(b) of the Head Lease that the tenant not be in breach at the time of the proposed assignment. The second was that ZAG had failed to satisfy the Council that the proposed assignee was suitable under clause 12.2(c) of the Head Lease, and that the assignee had failed to provide the financial statements reasonably requested by the Council.

32 Cox was overseas in late 2019 when the Council and Balakis re-entered the Premises after the breaches identified in the s146 notice were not rectified. The Premises had been abandoned and were in a filthy condition upon re-entry.

33 Cox never obtained a sublease nor was the Head Lease ever assigned to him. Despite this, he was running the café and in occupation of it for some 3.5 years before deciding to quit the Business in mid-2019. It is not readily clear on the evidence whether the Business was profitable, although it seemed to have picked up initially once Cox took over. Cox stopped paying rent from about July 2017 and did not pay any of the rates and charges imposed on the Premises. ZAG did not pay any Council rates until January 2019. Self-evidently, Cox was at the Premises with the permission of ZAG so, to that extent, he was always its licensee, albeit accepting that ZAG was in breach of its Head Lease by not having first obtained approval for Cox to occupy or share the Premises. The Council was aware that Cox was in occupation from 2016, although it was told by Balakis that Cox was only there in his capacity as a manager. Later attempts to agree upon a formal management agreement did not eventuate. It was not disclosed to the Council that ZAG had executed the Sublease with Cox in July 2016, which was a clear breach of its obligations under clause 12 of the Head Lease. The final attempt to assign the Head Lease in 2019 failed because, although the Council would have been willing to do so, by that stage Cox had given up on the Business and did not provide the financial information requested by the Council.

34 As outlined earlier, Cox’s claim is for moneys had and received. The plaintiff says the claim is restitutionary in nature, with its foundations now recognised in the concept of unjust enrichment.^[5] In order to make a claim for restitution, a claimant must prove the existence of an unjust factor such as mistake, duress, undue influence or failure of consideration, that qualifies or vitiates the basis for another’s right to retain a benefit or enrichment.

35 In Equuscorp Pty Ltd v Haxton,^[6] the High Court summarised the approach in determining a claim for restitution for money had and received as follows:

“In David Securities Pty Ltd v Commonwealth Bank of Australia, this Court explained the part played by unjust enrichment in a claim for money had and received (in that case for recovery of a payment made under mistake of law). That explanation may be expressed, at a fairly high level of abstraction, as an approach to determining such claims. In summary:

36 In this instance, Cox relies upon the unjust factor of failure of consideration together with conditionality of payment. Failure of consideration does not mean the same as it does in the contractual context. The consideration which must fail is the basis or condition on which a transfer is made. In David Securities Pty Ltd v Commonwealth Bank of Australia,^[7] the majority said that:

“In this context, consideration means the matter considered in forming the decision to do the act, ‘the state of affairs contemplated as the basis or reason for the payment’.”

37 In Roxborough v Rothmans of Pall Mall Australia Ltd,^[8] the High Court said:

“Failure of consideration is not limited to non-performance of a contractual obligation, although it may include that. The authorities referred to by Deane J, in his discussion of the common law count for money had and received in Muschinski v Dodds, show that the concept embraces payment for a purpose which has failed as, for example, where a condition has not been fulfilled, or a contemplated state of affairs has disappeared. ... In the case of money paid pursuant to a contract, it would involve too narrow a view of those ‘general equitable notions’ to limit failure of consideration to failure of contractual performance.”

38 The plaintiff puts his case in two ways. The first is that there has been a total failure of consideration. The second, framed in the alternative, is that there was a conditional payment and that the failure of the condition itself provides a separate basis of recovery. In doing so, the plaintiff relies upon the decision of the High Court in Baltic Shipping Co v Dillon.^[9]

39 In terms of a total failure of consideration, this is referred to in paragraph 29(b) and (c) of the amended statement of claim,^[10] in which it is alleged:

“(b) ... there was a total failure of consideration in respect of ZAG’s obligation to provide a lawful right to occupy the Premises pleaded in paragraphs 14(n) and (n1) above;

40 The plaintiff contends firstly that there has been a total failure of consideration here, in that the payment of the balance of the purchase price was conditional upon the grant of a sublease on the terms of the Sublease executed by the parties. The plaintiff argues that the condition is the consideration, and if the condition fails then the consideration totally fails.

41 The plaintiff also relies upon the statement of McHugh J in Baltic Shipping where his Honour said:^[11]

“If the promise has not been performed, there has been a total failure of consideration by reason of the nonfulfilment of the condition, and the money is recoverable as money had and received...”

42 The second way in which Cox puts his case is that there is a discrete ground of recovery where a payment is made on a condition which fails, independently from the concept of a total failure of consideration.

43 Reliance was placed upon a passage from Mason CJ in Baltic Shipping where his Honour said:^[12]

“An alternative basis for the recovery of money paid in advance pursuant to a contract in expectation of the receipt of the consideration to be provided by the defendant may arise when the defendant’s right to retain the payment is conditional upon performance of his or her obligations under the contract. This basis of recovery has a superficial, but not a close, resemblance to the concept of an entire contract. In this class of case the plaintiff may be entitled to recover so long as the payment remains conditional.”

44 The plaintiff referred to the decision of Ward J (as her Honour then was) in Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) where her Honour said at [284]:^[13]

“Although Hirst J refers to a remedy in quasi contract for total failure of consideration in course of his reasons, Guardian Ocean strictly so-called may be seen as a failure of condition case (that being also a recognised basis upon which restitution operates to entitle the plaintiff to repayment although in each case relief is based on a different principle). The distinction between a conditional payment and a claim for total failure of consideration was discussed in Baltic Shipping Co v Dillon...”

45 Cox pleads that payment of the balance of the purchase price in this case was conditional upon the grant of a valid and effective sublease on the terms set out in the Sublease. If this is accepted, then it follows from the terms of the parties’ agreement that the payment made of $350,000 must be returned. This is classified as being a claim for a debt as opposed to damages. Cox expressly disavowed that he was making any claim for breach of contract or seeking contractual damages.

46 The plaintiff identified three propositions relating to failure of condition, being his primary claim for relief for moneys had and received. These are dealt with below.

47 The plaintiff claims a term should be implied into the parties’ agreement, namely, that ZAG would grant a sublease on the terms of the Sublease. The plaintiff contends such a term should be implied relying upon the five relevant factors identified in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.^[14] The relevant factors are as follows:

48 The plaintiff particularly emphasises that such a term is required to give business efficacy to the transaction because it was:

49 The plaintiff claims that such an implied term would satisfy the other limbs of the BP Refinery test in that it is reasonable and equitable, so obvious it goes without saying, and capable of clear expression.

50 The defendants claim that the plaintiff’s position in this regard is a “lawyer’s device” raised well after the fact of the period in dispute. They assert that the plaintiff was content at the outset with a contingent interest that would default to something else and suggest that the purported implied term does not satisfy the element of the BP Refinery test that the term “go without saying”. The defendants further suggest that the plaintiff abandoned performance of the condition he contends for by ceasing his efforts to obtain consent to the Sublease. The defendants claim the plaintiff failed to produce the business records required to acquire the Sublease, and that their ability to obtain the Council’s approval to a sublease was duly reduced. They suggest that any pre-condition was qualified by the plaintiff’s duty to cooperate to enable performance of the condition and that the plaintiff cannot be a beneficiary of his own wrong in this regard.

51 The plaintiff disputes this, noting that Cox’s subjective understanding and subsequent conduct is irrelevant for the purposes of construing the terms of the contract. He notes that the use of post-contractual conduct in determining whether there was an implied term is controversial, and to be approached with caution. He further suggests that, should the Court not accept that the implied term should be read into the contract, then his submissions would also support a finding of an alternative implied term that ZAG would use its best endeavours to obtain a sublease. Finally, the plaintiff suggests that the defendants’ claims that Cox breached an obligation to cooperate to enable performance of the condition should not be accepted, pointing out that such an allegation is not pleaded, and that the principle relied upon is not established.

52 The plaintiff pleads in paragraph 13 of the amended statement of claim that the terms of the relevant agreement were constituted by a combination of the two documents relied upon (being the USA and the Sublease), oral discussions, and by implication. Cox’s evidence was that he discussed with Balakis his desire to obtain a sublease when purchasing the Business. Balakis for his part said he had left the matter to his solicitors to draw up the necessary documents. The fact that the defendants’ solicitors were instructed to draw the Sublease and that it was executed demonstrates the parties’ intention that this was the way in which Cox’s right of occupation would proceed. The grant of a valid sublease, however, could not occur without the prior consent of the head landlord, so it was always contingent upon the approval of a third party.

53 The case pleaded is that there was an implied term that ZAG would grant a sublease in the form of the executed Sublease. There is no express term in the USA relating to the grant of a sublease by ZAG or indeed any mention of a sublease at all.

54 In my view, a term cannot be implied that ZAG would grant a sublease on the terms of the document executed in circumstances where the grant was always subject to the approval of third parties. In this case, consent was required both from the Council and at ministerial level. In other words, the ability to grant a sublease was not solely within ZAG’s power. Therefore, I am not satisfied that a term should be implied in the form proposed by the plaintiff, as it could not go without saying that this is a term the parties would have agreed upon. Cox gave evidence that he knew at the time of entry into the USA that the sublease would be subject to Council approval. He was also aware that from his experience with leases that the Council would need to be satisfied as to his financial reputation. Further, it is improbable that ZAG would have agreed to such a term as it could not be sure the head landlord’s consent would be forthcoming. The implied condition alleged is that a sublease would be granted on the terms set out in the Sublease but that may not have been possible. There may have been changes proposed by the Council or indeed by the parties, such that any sublease ultimately agreed upon may have not been in the same terms as the Sublease. In fact, the sublease which was proposed in late 2016 did have material differences from the Sublease, not least that the commencement and termination dates were different.

55 Moreover, as seen in the factual narrative set out above, there were alternative ways for Cox to lawfully occupy the Premises, such as by way of a management agreement or assignment of the lease subject to Council approval. Given this, it is not so obvious that it goes without saying that ZAG would have agreed to the implied condition alleged, as there were other options available under which Cox could have lawfully occupied the Premises.

56 Ordinarily, in a sale of business agreement there would usually be an implied term to the effect that a tenant would use its best endeavours to obtain the consent of the head landlord to the proposed sublease to the sub-tenant. This is an alternative implied term put forward by the plaintiff in paragraph 196 of his closing submissions, in the event the implied term to grant a sublease was not accepted. The difficulty with this is that an implied term for ZAG to use its best endeavours to obtain a sublease is not pleaded. No request was made to seek to amend the pleadings to introduce an alternative implied term of the type now alleged. I will not permit the plaintiff to seek to introduce an alternative implied term in his final addresses in circumstances where the point was not pleaded and nor did the defendant have an opportunity to respond to this new allegation.

57 The type of legal arrangement that would have better protected Cox’s position was proposed in a letter sent from his current lawyers on 17 May 2017. An alternative form of deed was put forward as a way of attempting to resolve the parties’ differences and clearing up the terms of the sale agreement. The deed proposed that the purchaser could be refunded his money if various defined events did not occur, including the transfer or grant of a lease or sublease. The defendants flatly refused to enter into any other contractual arrangement and declined to sign any new deed. Self-evidently, Cox is bound by the contract and the documents he signed in July 2016. It is too late after the event to seek to introduce terms upon which the parties never agreed or are incapable of being implied. It should also be noted that Cox subsequently paid over the balance of the purchase price in the full knowledge at the time he did so that he did not have a sublease. Cox agreed in cross-examination that he could have decided to terminate the agreement in May 2017. Had this been a breach of contract case, then possible issues of waiver might have arisen from this conduct.

58 In all the circumstances, I am not persuaded that there was an implied term of the agreement in the form alleged by the plaintiff, namely, that ZAG would grant a sublease in the terms of the Sublease.

59 The plaintiff claims that the ZAG’s entitlement to the balance of the purchase price being conditional on the grant of the Sublease was an express, or alternatively an implied, term of the agreement between the parties.

60 The plaintiff pleads that the grant of a valid sublease (or, alternatively, a lawful and valid right of possession) by ZAG to OCSE or Cox on the terms specified was a condition precedent to Cox’s obligation to pay the balance of the purchase price under the USA. It is alleged that this arises upon the proper construction of clauses 2(a)(ii) and 5(a) of the USA. Further, it is submitted that it was a condition subsequent that there would be a valid sublease granted on the terms of the Sublease, the non-fulfillment of which entitled Cox to avoid the agreement and to the return of any of the amount of the purchase price paid.^[15] The plaintiff said whether the condition was a condition precedent or a condition subsequent made no difference in the end.

61 The plaintiff submits that an express term to the effect alleged arises from the correct construction of clauses 2 and 5(a) of the USA, the implied term that the Sublease would be granted, and the sublease deed itself. Clause 2 of the USA provides:

“(a) The vendor hereby agrees to sell and the purchaser hereby agrees to purchase 550,000 units in the unit trust for the purchase price of $510,000.00 which sum shall be paid as follows:

63 Cox submits the payment obligation under clause 5(a) is conditional upon the grant of a sublease on the terms set out in the Sublease. There is no mention of the Sublease in this clause, as can be readily seen, nor in the USA at all.

64 Clause 4 of the USA sets out various steps that were to be undertaken between settlement and the date the balance payment was due, including arrangements for the transfer of the liquor licence. If neither the purchaser nor another person nominated by the purchaser obtained a liquor licence within 90 days of the settlement date, the purchaser would be in default, and was required to return to the vendor (ZAG) 220,000 units in the trust, to resign as director, and to forfeit all moneys previously paid.

65 The plaintiff makes the point that a liquor licence cannot be transferred to a person who does not have a lawful right to occupy the premises to which the licence relates, relying upon s32 of the Liquor Control Reform Act 1998 (Vic). The plaintiff relies upon this clause as objectively demonstrating the intention of the parties for payment of the balance of the purchase price to be conditional upon the grant of a sublease.

66 The plaintiff relies on Mason CJ’s finding in Baltic Shipping that “[t]he question whether an advance payment, not being a deposit or earnest of performance, is absolute or conditional is one of construction”^[17] to suggest that here the parties’ intentions, objectively ascertained, was that the right was conditional. The plaintiff notes that:

67 Alternatively, the plaintiff submits that the proposed term that payment of the balance was conditional on the grant of the Sublease satisfies the BP Refinery test and may be implied.

68 The defendants call this limb of the plaintiff’s claim “fundamentally misconceived”. They note that the plaintiff does not seek damages for the breach but rather to avoid the agreement, noting that the proposed term bears no relationship to the amount of money sought by the plaintiff. They suggest that terms are notoriously difficult to imply by reason of the five elements required under the BP Refinery test and suggest that the plaintiff clearly did have a legal right to occupy the Premises which he made use of for over three years. They contend that the proposed term has no basis in the written agreement or at all, noting that:

69 By way of reply, the plaintiff submits that the defendants’ argument amounts to an incorrect characterisation of the relevant basis or consideration, suggesting that the relevant consideration in these circumstances is not the grant of the Sublease but rather the state of affairs contemplated as the basis or reason for the payment. In a lengthy discussion of the relevant case law, the plaintiff suggests that this means that there is no need to “pair” aspects of the money paid to particular benefits promised under the contract. Counsel for the plaintiff address the defendants’ point that the plaintiff occupied the premises for 3.5 years by noting that a sublease cannot be partly granted or partly lawful or partly valid, and so occupation could not amount to partial fulfillment of the proposed term. The plaintiff submits that in this proceeding where payment is conditional upon grant of a sublease, the relevant consideration itself is the grant of the sublease.

70 The plaintiff’s primary claim is dependent upon establishing a condition that the payment of the balance of the purchase price was conditional upon the grant of a valid sublease. There was no express term of that sort in either the USA or the Sublease, nor is it open to find that the term was made orally between the parties having regard to the inconclusive evidence given by Cox and Balakis about their negotiations.

71 The remaining issue then is whether a term to this effect can be implied. For the following reasons and having regard to the elements set out in BP Refinery, I am not persuaded that such a term should be implied. Firstly, such a term runs counter to the express term in the USA regarding the payment of the balance of the purchase price in clause 5(a). Secondly, it is not so obvious that it goes without saying that both parties would have agreed to it. The limited oral evidence given by Cox and Balakis as to their negotiations would not support such a term. Cox gave evidence that he was aware he was not paying anything for good will. Thirdly, the term relied upon by Cox must be one which is necessary to give business efficacy to the parties’ contract. Whilst Cox was desirous of a sublease, his right to occupy the Premises could have been lawfully obtained in other ways, such as a management agreement or an assignment of the Head Lease. The Sublease, had it been approved, was not assignable by him.

72 The failure to transfer a liquor licence was an event of default but did not disentitle the vendor from receiving the balance of payment from the purchaser. It appears that Balakis was taking steps to have Cox nominated as an associate on his liquor licence after June 2018.

73 I am not persuaded on the evidence or by the legal submissions put by Cox that a term should be implied into the parties’ agreement that ZAG’s entitlement to the balance of the purchase price was conditional on the grant of a sublease.

74 There being no express or implied term of the type alleged by the plaintiff, it follows that there can be no failure of condition if there was no operative condition in the first place. Consequently, I was not satisfied that the plaintiff made out his primary claim, being a failure of condition.

75 There was a debate at trial as to whether the defendants had admitted in their earlier defence that there was an implied term to the effect alleged. Cox argued that there was, and there having been no application to withdraw the admission, that the defendants were bound. The defendants noted that the allegations in paragraphs 14(l), (n), (n1) and (o) of the amended statement of claim were materially different to the original pleading, especially having regard to the more fulsome particulars provided. That being so, the defendants were entitled to deny what was a new and more detailed amendment. I agree. If I am wrong on this, I would have allowed the alternative application made by the defendants to withdraw the admission, on the assumption it had been made. The defendants noted the plaintiff had the amended defence some four months before trial. No other evidence would need to have been called, as the evidence underpinning the arguments regarding the implication of terms was the same, with the result that the plaintiff was not prejudiced. I consider it is in the interests of justice that the defendants be permitted to rely upon the matters put in their amended defence, particularly as the nature of the plaintiff’s claim had shifted.

76 The plaintiff contends that “[t]here can be no doubt ZAG never granted a valid and lawful sublease on the terms set out in the Sublease Deed, because the Council never consented to it.” The Head Lease did not allow a sublease without consent of the Council, and that any rights conferred by the defendants on the plaintiff “did not involve the full rights of occupation specified under the Sublease Deed.” In the circumstances, the plaintiff claims that the condition entitling ZAG to retain the balance of the purchase price was never fulfilled and that he is therefore entitled to call upon a prima facie right of restitution requiring ZAG and Balakis to return the payment of $350,000.

77 The defendants disagree, suggesting that insofar as a lease is defined as right of undisturbed occupation, the plaintiff had that during his occupation of the Premises. Echoing their amended defence, the defendants note rhetorically that no one sought to evict the plaintiff in the 3.5 years of his occupation, suggesting that there is no reason to doubt that his occupation could not have continued as the Council made no demands for his removal. Whereas the defendants accept that the Council communicated to Mr Balakis that the Sublease was not approved and in that sense it is not valid, they further contend that while “Council was prepared to consent to a transfer of the lease from ZAG to Mr Cox... [they] were frustrated by Mr Cox’s failure to provide contemporary financial documents [and/or] dissuaded from doing so by his serious breaches of the Head Lease.”

78 The defendants further note that the plaintiff ceased paying rent or rates from 1 July 2017, suggesting that save for a saleable property right the plaintiff had the benefit of ownership without the associated expense. In their pleading, the defendants claim that “at all material times the superior right of possession was the Head Lease which could be transferred to the plaintiff if he met certain terms and conditions”,^[18] and that even if there was a serious defect in the Sublease it was curable. The defendants note that although the plaintiff became aware of this defect in the second half of 2016 it simply elected “not to bother” to attempt to rectify it. The defendants assert that the plaintiff’s case in this regard “requires a sequence of implausible inferences and implications which are unsupported by anything expressly said or written.”

79 In response, the plaintiff submits that Cox provided the defendants with various documents prior to signing the USA which were to be submitted to the Council by the defendants when they sought for the Sublease to be approved, including a resume with employment history, several references, tax returns for 2013-2015, and a summary of assets and liabilities.

80 This point can be readily resolved. There is no factual dispute that a valid sublease was never granted by ZAG. The executed Sublease was not consented to by the Council and the relevant Minister as was required under clause 12 of the Head Lease. In the absence of their prior consent, the Sublease was ineffective.

81 For the primary claim to succeed the plaintiff must prove it was a condition of the sale of business agreement entered into by the parties that a sublease would be granted. For the reasons given above, I am not satisfied that such a term existed either expressly or by implication. That being so, there is no legal requirement for ZAG to repay the balance of the purchase price paid of $330,000 as moneys had and received. The additional sum paid of $20,000 represented an agreed figure for stock. This sum did not form part of the stated balance of purchase price in the USA. Although not directly referred to at trial, there would appear to be no basis why this amount should be refunded by ZAG as moneys had and received, as presumably the stock was used by Cox at the Premises.

Plaintiff’s second claim: was there a total failure of consideration entitling the plaintiff to the return of the balance of the purchase price?

(a) Is there severable consideration for the payment of $350,000 and what is it?

82 The plaintiff’s alternative claim is that there was a total failure of consideration of the agreed return for the payment of the balance. While failure of consideration must be total, one can have a total failure of a several part of the consideration.^[19] The plaintiff cites the High Court decision in Mann v Paterson Constructions Pty Ltd as authority for the proposition that in determining the relevant consideration, one looks to the basis for the payment or what was bargained for the relevant payment.^[20]

83 The defendants agree this summary of the law by the plaintiff is correct but argue that a partial failure of consideration is insufficient for an order for restitution. An exception is where the contract is severable in a way that part of the moneys is clearly referable or pairable to a severable aspect of performance. The defendants note the USA does not link the Balance payment to the Sublease. The amended statement of claim did not plead severability of consideration and the point only arose in submissions.

84 The defendants suggest that there is no severable consideration for the balance payment of $350,000, arguing that at least some amount of money must be clearly referable to the alleged failure of consideration, whereas in this proceeding the payment cannot be matched or “paired” with a severable part of the performance. The fact that the payment was done in two tranches did not assist, as there was no stated relationship between the Balance payment and a right of occupation. The defendants claim that the failure to allocate a certain sum for the performance contended for is fatal.^[21]

85 The plaintiff argues that where there is a contractual term to the effect that a payment is conditional upon an identified basis, there is no need, in a claim for total failure of consideration, to segregate aspects of the money paid and “pair’” it to a particular benefit promised under the contract. They suggest instead that the basis or consideration is stipulated by the conditional payment term and that the notion of apportionment has no role to play in such scenarios. The plaintiff suggests that while failure of consideration must be total, one can have a total failure of a several part of the consideration, arguing that by failing to grant a valid sublease the defendants have failed to deliver the benefit bargained for by the plaintiff, as opposed to any benefit which might have been received in fact.

86 The plaintiff contends that because payment was conditional on the grant of a lawful and valid sublease, the fulfilment of that condition is the consideration, and as that condition was not fulfilled, there has been a total failure of consideration.

87 The defendants note that the plaintiff received benefits above and beyond what he had paid for, and that at best the consideration for the payment was both the right to occupy the Premises and to operate the business. A sublease was not something that Cox was able to sell or assign in any event. The defendants contend that even if there was some partial failure of consideration, the plaintiff elected to perform the agreement by operating the Business from the Premises for 3.5 years. Cox was not entitled to seek restitution for the sum claimed as he had partial enjoyment, including all receipts taken whilst running the Business for over three years. The defendants contended the failure of consideration must be total before restitution will be ordered.^[22]

88 The non-fulfillment claimed by the plaintiff is predicated on there being a positive obligation to grant a valid sublease – this being the “consideration” for the transaction. In other words, this was the benefit bargained for by Cox and which he did not receive. I have already found that it was not a term of the parties’ agreement that payment of the balance of the purchase price was conditional on the grant of a sublease. The deal struck was that Cox would acquire the Business by paying for the units in the OCSE Trust and acquiring shares in the related trustee corporate entity. In order to run the Business, Cox needed to be able to occupy the Premises. He could be there with the permission of ZAG as licensee, but if ZAG were to part with possession of or share the Premises, consent was required from the Council and the Minister under clause 12 of the Head Lease. It was not a requirement of the deal struck that the balance of the purchase price would only be payable if a valid sublease was granted. That might have been a sensible and appropriate course if the deal was done in the manner suggested by Brixton Legal in May 2017, but it was not the way the deal was done. Cox is bound by the deal he struck and the documents he signed. It was never put that the consideration was in fact the units sold, which it seems were not ultimately transferred, but only that the agreed return for the balance of the purchase price was a lawful and valid sublease on the terms of the Sublease. I do not accept the plaintiff’s submission that the consideration for the balance of the purchase price was the grant of a sublease, given this is not borne out by the evidence and not reflected in any of the documents that were signed. Nor am I persuaded that it should arise as a matter of law.

89 Further, in my view, Cox did receive a benefit, namely, the use and occupation of the Premises and running the Business for 3.5 years, such that it can be said he enjoyed partial consideration. At the very least, he did receive part of the benefit he had bargained for being the opportunity to run the café business. That being so, any failure of consideration was not total and, in those circumstances, Cox is not entitled to restitution of the sum paid.^[23]

90 For the reasons given, I was not persuaded that the plaintiff’s alternative claim based on a failure of consideration should succeed.

91 For the foregoing reasons, the plaintiff’s claim will be dismissed. Unless the parties can point to any reason why costs should not follow the event, I propose ordering the plaintiff pay the defendants’ costs of the proceeding, including any reserved costs, to be taxed on the standard basis in default of agreement. The parties are directed to confer and provide a minute of proposed orders to give effect to these reasons. If agreement cannot be reached, then the parties are directed to file and serve any submissions on the form of orders, including costs, by 4.00 pm on 23 December 2021, limited to five pages. Final orders will then be made on the papers.

I certify that these 28 pages are a true copy of the Reasons for Judgment of Her Honour Judge A Ryan delivered on 15 December 2021.

^[1] This figure comprises the balance payable of the purchase price of $330,000 and $20,000 for stock.

^[3] The sum of $300,000 was paid without prejudice to Cox’s rights and without any admission: see Court Book 422.

^[4] The Sublease appears to cover the same period as the Head Lease which may have resulted in it not being effective as a sublease but rather an assignment – this point was not taken up in the pleadings.

^[16] It is noted that in fact there was no clause 2(b). This was a drafting error, as the USA has only a clause 2(a).

County Court of Victoria

Cox v ZAG Investments & Anor [2021] VCC 1842 (15 December 2021)