Central Coast Council v Norcross Pictorial Calendars Pty Ltd

BATHURST CJ: The facts in this appeal are relatively straightforward. By contrast, the legal issues are somewhat complex.

On 10 December 2002, the Council of the City of Gosford, the predecessor to the appellant (the Council), entered into an agreement (the Joint Venture Agreement) with the first respondent (NPC) pertaining to the development of certain land owned by the Council. The Joint Venture Agreement involved the construction by NPC on behalf of the Council of a car park on part of the land (the Car Park Land) and the development of an adjoining parcel of land described in the Joint Venture Agreement as the PTL Land. As part of the Joint Venture Agreement, the Council granted an Option to NPC or its nominee to purchase the PTL Land for nominal consideration.

After subdivision of the Car Park Land and the PTL Land into separate lots, the Option was exercised on 18 March 2005 by the second respondent (PTL) as nominee of NPC.

Ten years later, PTL entered into a building contract to construct a six-storey residential and commercial building on the PTL Land. It was common ground that the PTL Land was found to be contaminated with asbestos, acid sulphate soil and general solid waste. PTL claimed from the Council the cost of removal of the asbestos, agreed to amount to $360,878, the cost of excavation of acid sulphate soil, $65,661, and the removal of general solid waste, $126,928.10. The claim was made under the indemnities contained in cll 7.2 and 15.1(b) of the Joint Venture Agreement (see [27]–[29] below). It was not in issue on the appeal that the material removed was “contamination” within the meaning of that expression in cl 7 of the Joint Venture Agreement.

The primary judge found that PTL was the successor to NPC within the meaning of cl 19.9 of the Joint Venture Agreement and thus entitled to claim under the indemnities.

Clause 4.1 of the Joint Venture Agreement obliged the Council to grant such easements as requested by NPC acting reasonably. On 15 May 2016, PTL requested an easement over a very small part of the Car Park Land for the supply of electricity. The primary judge found it would have “facilitated the most direct electricity supply to the PTL Land”: Norcross Pictorial Calendars Pty Ltd v Central Coast Council [2020] NSWSC 1201 (the primary judgment) at [33].

On 27 July 2016, the Council resolved to grant the easement, but without notice to PTL, rescinded the resolution on 23 November 2016. As a result, the builders, Richard Crookes Construction Pty Ltd (the builders), claimed an extension of time, which was granted. The primary judge held that PTL as successor to NPC was entitled to request the easement, that the easement should have been granted, and that as a consequence of the Council’s failure to do so, PTL suffered a loss in an amount of $284,869.

As a consequence, PTL was awarded damages totalling $913,439, together with pre-judgment interest in the amount of $191,434.

The Council has appealed on the basis that the primary judge erred in concluding that PTL was the successor to NPC pursuant to cl 19.9 of the Joint Venture Agreement and thereby entitled to sue on that Agreement.

Against the probability the appeal was successful, NPC filed a cross-appeal, whilst PTL filed a notice of contention.

The following grounds are relied on by NPC in its cross-appeal:

The following matters are relied upon by PTL in its notice of contention:

Before dealing with the primary judgment it is convenient to set out the relevant provisions of the Joint Venture Agreement.

The Joint Venture Agreement contained the following recitals:

It can be seen that recital B makes express reference to NPC’s expertise in property development.

The following definitions set out in cl 1.1 of the Joint Venture Agreement are relevant to the proceedings. The Car Park Land and the PTL Land are expressly identified, whilst “Land” is defined as “the PTL Land and the Car Park Land.” “Contract for Sale” is defined as “the contract for sale entered into or to be entered into by the parties on the exercise of the Option by NPC.” “Option” is defined in the following terms:

“Project” is defined in cl 1.1 of the Joint Venture Agreement as follows:

The expression “Works” is defined in cl 1.1 of the Joint Venture Agreement as “the works described in Schedule 3.” Broadly speaking, they relate to the construction of the car park.

Clause 1.2 of the Joint Venture Agreement contains some general interpretation provisions. Of relevance is cl 1.2(a)(ii), which is in the following terms:

Clauses 2.1 and 2.2 of the Joint Venture Agreement provided as follows:

There are two matters which should be noted. First, cl 2.1 of the Joint Venture Agreement does not merely relate to the Works, but also contains obligations in respect of the Project. Second, although cl 2.2 of the Joint Venture Agreement permits the engagement of consultants, the clause emphasises the responsibility of NPC to carry out its obligations under the Joint Venture Agreement.

Clause 4 of the Joint Venture Agreement deals with the Council’s obligations. They include subdividing the Car Park Land and the PTL Land and rezoning the PTL Land to the extent necessary. It also obliged the Council to keep free of encumbrances the Car Park Land until completion of the Works, and the PTL Land until completion of the Contract for Sale. Because some reliance was placed by the parties on the provisions of cl 4.1(a)(iii) and cl 4.1(f), it is convenient to set them out in full:

The Licence referred to in cl 4.1(f) is the Licence referred to in cl 11 of the Joint Venture Agreement for NPC to occupy the land to carry out its obligations under its terms.

Clause 5.1(a) of the Joint Venture Agreement obliged NPC to manage the Project in accordance with the Project Documents. The Project Documents were set out in Sch 5. They included Council’s consent to the NPC development application and the construction certificate in respect of that application. Clause 6.1 obliged NPC (not necessarily concurrently) to prepare a development application in respect of the Works and a development application in respect of the residential and commercial development proposed to be constructed by NPC on the PTL Land.

Clause 5.1(g) of the Joint Venture Agreement obliged NPC prior to the exercise of the Option, to deliver to the Council a Bank Guarantee for an amount equal to the cost of completion of the work plus 10 per cent.

Clause 6.3 of the Joint Venture Agreement gave both parties the right to terminate the Joint Venture Agreement in certain circumstances. It was in the following terms:

Clause 7 of the Joint Venture Agreement contains warranties and indemnities granted by the Council to NPC. It is in the following terms:

Clause 8 of the Joint Venture Agreement contains a warranty by NPC to the Council that it has the necessary skill, expertise and capacity to comply with its obligations under the Joint Venture Agreement.

Clause 15 of the Joint Venture Agreement contains mutual indemnities. Of relevance is cl 15(1)(b), which is in the following terms:

Clause 19.9 of the Joint Venture Agreement deals with the successors and assignees. It provides as follows:

It was common ground between the parties that something had gone wrong with the language of this clause and it should be read as follows (the words in parenthesis being added to the text):

Clause 23.3 of the Joint Venture Agreement provided that NPC would pay and bear the Project Expenses.

The Option Agreement was entered into on the same day as the Joint Venture Agreement. The recitals state that the Council has agreed to grant to NPC an Option for NPC in its name or in the name of its nominee to purchase the Property. Although not defined in these terms, there is no issue that the Property is the PTL Land.

Clause 2.1 of the Option Agreement provided that in consideration of the entry into the Joint Venture Agreement, the Council grants NPC an Option for NPC or its nominee to purchase the Property.

Clause 2.3 of the Option Agreement provided that if NPC or a nominee exercise the Option, the Council and the purchaser are “regarded as immediately bound” under the contract annexed to the Option Agreement.

Clause 2.5 of the Option Agreement is in the following terms:

The Nominee Option Notice contained the following provisions:

It should be noted that neither the Nominee Option Notice nor the formal contract annexed to the Option Agreement imposed an obligation on the nominee to comply with any of the obligations of NPC under the Joint Venture Agreement.

However, special condition 40 of the contract annexed to the Option Agreement was in the following terms:

This provision, although infelicitously drawn, corresponds to a significant extent to cl 6.3 of the Joint Venture Agreement.

The period during which the Option was to be exercised was between the date which was three months after the Option Agreement was entered into and three years after the Commencement Date (not defined in the Option Agreement, but defined in the Joint Venture Agreement as the date of that Agreement).

Prior to the exercise of the Option, a further Agreement was entered into between NPC, PTL and a company, PTL Holdings Pty Ltd (PTL Holdings), in its capacity as trustee of the PTL Holdings Trust (the Agreement).

The Agreement recited that PTL intended to become the registered proprietor of the PTL Land, and the parties’ desire to establish a joint venture to acquire the Land and construct a Building (as defined in the Agreement) on it. “Land” is defined in the Agreement as any land which PTL acquires after the date of the Agreement. The Agreement envisaged the registration of a Strata Plan with certain lots being owned by NPC and other lots by PTL Holdings. The Agreement relevantly contained the following provisions:

“Project Costs” were defined as the “costs associated with the acquisition of the Land and Construction Works”.

Although some reliance was placed by the Council on the existence of the Agreement, the undisputed evidence of Mr Kenneth Allen, who effectively controlled NPC, was that the Joint Venture Agreement was not performed and PTL Holdings was in fact deregistered on 12 May 2019. Mr Allen gave the following evidence:

It should be noted that notwithstanding Mr Allen’s statement, no claim has been made on the basis that NPC was in fact the beneficial owner of the land or is a creditor of PTL. Further, Mr Allen’s statement that NPC provided all cost contributions sits uneasily with the fact that in excess of $30 million was borrowed from the ANZ Banking Group Ltd (see [47] below), and with his own statement that funds were advanced by other entities controlled by him.

It appears the Option was exercised by PTL as nominee of NPC on 18 March 2005. However, construction work was not commenced until November 2015. Mr Andrew Cochrane, a director of PTL, acted as project manager for the Project. Mr Cochrane gave evidence that the proceeds of the sale of the units which were constructed, net of sales commission and legal costs, was about $43,055,920, of which $30,913,725 was paid to the ANZ Bank for payment of advances made by the bank in respect of the project. There is no evidence of any distribution of the surplus remaining. However, Mr Allen gave the following evidence:

There is no evidence that Mr Allen’s intention was ever carried into effect. Further, the company searches tendered at the hearing showed that as at 29 April 2019, both NPC and PTL remained registered.

The primary judge noted that the Joint Venture Agreement and the Option Agreement were entered into on the same day and the consideration for the Option Agreement was expressed to be the entry into the Joint Venture Agreement. His Honour also referred to the fact that NPC had the power to appoint a nominee to exercise the Option. In these circumstances, the primary judge concluded that the parties anticipated NPC might nominate another party to become the owner of the PTL Land, that the other party would develop the PTL Land, and in the circumstances, the other party would be the beneficiary of the warranties given by the Council.

It was in that context that the primary judge construed cl 19.9 of the Joint Venture Agreement. His Honour concluded the use of the word “successor” in cl 19.9 indicated that the parties intended any successor would have the same rights vis-a-vis each other as did NPC and the Council in the first place (at [62] of the primary judgment).

The primary judge noted that the word “successor” was not defined, but contrasted it with the use of the expression “successor in law” in cl 1.2(a)(ii) of the Joint Venture Agreement, concluding that the use of the expression “successor to a party” was intended to have a wider meaning than the expression “successor in law”. In those circumstances, his Honour concluded that “successor” in the context of cl 19.9 simply meant someone who succeeds to the property or rights of another. His Honour also concluded that the Joint Venture Agreement and the Option Agreement were part of the same transaction and that when the Agreements were considered together, an intended function of cl 19.9 was to facilitate the continuation of the Joint Venture Agreement for the benefit of a nominee under the Option Agreement (at [69] of the primary judgment). His Honour also rejected the submission that a novation was necessary to achieve that effect (at [71] of the primary judgment).

In rejecting the proposition that a novation was necessary, the primary judge concluded that NPC remained liable under the Agreement. His Honour made the following remarks:

In the circumstances, the primary judge concluded that PTL as successor to NPC could enforce the Joint Venture Agreement against the Council (see [75] of the primary judgment).

In those circumstances, the primary judge did not find it necessary to deal with the issues raised by the notice of contention and cross-appeal.

The principles governing the construction of commercial contracts such as the present were not in dispute. The contract is to be construed by what a reasonable business person would understand it to mean. That requires consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objects to be secured by the contract: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]–[52]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18] and [78].

The question in the present case is whether the expression “successor to a party” in cl 19.9 of the Joint Venture Agreement is wide enough to include PTL as the nominee of NPC under the Option Agreement.

In considering this question, a number of matters should be noted. First, the purpose of the Joint Venture Agreement, at least so far as the Council was concerned, was primarily to achieve construction of the car park (see the recitals to the Joint Venture Agreement referred to at [14] above), and at least the development of the PTL Land. In that context, the recitals specifically made reference to the expertise of NPC in property development and the co-ordination of construction projects.

Second, the Project in the present case involved both the construction of the car park and the construction of a residential and commercial building on the PTL Land (see the definition of “Project” referred to at [17] above.) In consequence, cl 2.1(b) of the Joint Venture Agreement extended not only to the carrying out of the car park works but contained mutual covenants with respect to the Project as defined.

Third, there is nothing in the Joint Venture Agreement itself which would indicate that it was contemplated that the obligations of NPC under the Agreement would be carried out by anyone other than NPC.

Fourth, apart from the definition of “Option” in the Joint Venture Agreement, and the requirement that on exercise NPC would provide a bank guarantee for the cost of completion of the works plus 10 per cent evidently as security for completion of the works, there is no mention of the Option Agreement in the Joint Venture Agreement.

Fifth, it must be remembered that the Option was able to be exercised three months after the entry into the Option Agreement, a point in time where construction of the car park on any view would not have been near completion. It would be surprising if the Council intended that the effect of the exercise of the Option would confer rights and obligations upon a party unknown to it at a time when the work contemplated by the Joint Venture Agreement had only just commenced.

Sixth, the Option Agreement is entirely a standalone Agreement expressed to be entered into in consideration of the Joint Venture Agreement. It would be unusual in these circumstances if the effect of the nomination under the Option Agreement would be to confer all the rights and obligations under the Joint Venture Agreement on the nominee, including the obligation to construct the car park.

Seventh, the rights and obligations of PTL as nominee and the Council were regulated by the contract entered into as a result of the exercise of the Option Agreement, not by the Joint Venture Agreement. The contract does not impose any obligation on PTL to carry out any of NPC’s obligations under the Joint Venture Agreement. The Nominee Option Notice, whilst acknowledging that the nominee agreed to be bound by the Option, does not state it agreed to be bound by the Joint Venture Agreement.

Critically, for the purpose of cl 19.9, PTL did not succeed to any rights of NPC under the Joint Venture Agreement. The rights it succeeded to upon nomination were NPC’s rights under the Option Agreement to acquire the PTL Land. Even if it could be concluded that the nomination took place under the Joint Venture Agreement, the nomination would only extend to the nomination of PTL as purchaser of the PTL Land. It would require clear words to construe such a nomination as conferring on PTL the rights of NPC under the Joint Venture Agreement, much less imposing the obligations of NPC under it: Vickery v Woods (1952) 85 CLR 336; [1952] HCA 7 at 343; Salter v Gilbertson (2003) 6 VR 466; [2003] VSCA 1 at [17]–[18].

For these reasons, I am of the view that PTL was not the successor to NPC within the meaning of cl 19.9 of the Joint Venture Agreement and did not acquire any rights under the Joint Venture Agreement, including the right to call upon the indemnities.

I have set out the reasons the primary judge came to a contrary conclusion at [49]–[52] above. As I indicated, his Honour first noted that the parties contemplated another party might be the owner of the PTL Land who might develop it. It may be accepted that the parties contemplated that a third party might be nominated under the Option Agreement. However, it does not follow that the nominee would succeed to the obligations under the Joint Venture Agreement in respect of the PTL Land, including the obligations in respect of the Project referred to in cl 2.1(b) of the Joint Venture Agreement (see [20] above).

It may be accepted as the primary judge pointed out that any successor within the meaning of cl 19.9 of the Joint Venture Agreement would have the same rights and be subject to the same obligations as the original parties to the Joint Venture Agreement. However, the critical question is whether PTL is a “successor” within the meaning of cl 19.9.

So far as the use of the words “successor to a party” as distinct from the use of the expression “successor in law” in the interpretation provisions in cl 1.2(a)(ii) are concerned (see [19] above), whether any difference was intended (which may be doubted having regard to the clear drafting deficiencies in cl 19.9 of the Joint Venture Agreement) the expression in cl 19.9 could not extend to a person who did not succeed to the rights and obligations under the Joint Venture Agreement by assignment or otherwise, but was simply a nominee under a separate Option Agreement.

The primary judge with respect correctly confronted the problem that on one view the construction he preferred had the effect of relieving NPC of its obligations under the Joint Venture Agreement. However, the primary judge concluded that cl 19.9 did not have this effect having regard to the fact that cl 19.9 expressly did not permit the transfer or disposal of rights and obligations under the Joint Venture Agreement.

Even so, there are difficulties with that approach. The first part of cl 19.9 (read as agreed by the parties: see [31] above) specifically provides that a successor shall assume all rights and obligations conferred on the party as if such successor was named in the Joint Venture Agreement as a party. There is no carve out of any particular provision. The second part of the clause does not deal with successors, but simply emphasises that the successor provision does not permit a transfer or similar disposal of the party’s rights under the Joint Venture Agreement. It does not constitute a transferee or nominee as a successor.

Senior Counsel for NPC submitted that cl 19.9 does one of two things. First, it provides for a means by which PTL becomes a party to the Joint Venture Agreement “mutatis mutandis” or, where again “mutatis mutandis”, a reference to NPC can be taken to refer to PTL. The difficulty with this submission is that it assumes PTL is a successor to NPC within the meaning of cl 19.9. As I have indicated, that assumption is incorrect.

Senior Counsel for NPC accepted that on his preferred construction, cl 19.9 of the Joint Venture Agreement had the effect of PTL becoming a party to it and taking over NPC’s obligations without the Council having any say in the identity of the corporation which was to undertake the development. He accepted on one view that that was a surprising result. It would seem to me to be a result that no reasonable business person in the position of the Council would have contemplated.

In what appeared to be an alternate submission, Senior Counsel for NPC submitted that PTL did not take over the whole contract, the nomination relating only to the PTL Land. He submitted the effect was that PTL became the party responsible for and had all the rights relating to the PTL Land, but NPC remained the party with responsibility for the car park. He submitted that that was supported by the fact that the Joint Venture Agreement and the Option Agreement were entered into on the same day, and that both Agreements contemplated that a third party may acquire only the PTL Land. He submitted that the bifurcation was justified by the use of the words “mutatis mutandis” in cl 19.9 of the Joint Venture Agreement. He submitted, referring to Jaeger v Bowden (No 2) [2016] NSWSC 897 at [521] quoting Cohen J at 382 in Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379, that the phrase meant “with the necessary changes in place of detail”.

I am unable to accept this submission. First, there is nothing in cl 19.9 or any part of the Joint Venture Agreement which contemplates partial succession. Second, it ignores the fact that PTL acquired its rights as nominee under a separate contract. Third, it ignores the fact that NPC had continuing obligations in respect of the project which extended beyond the construction of the car park.

So far as the words “mutatis mutandis” are concerned, if they amount to more than a drafting flourish, they make it clear that where there is a successor, the successor succeeds to all the rights and obligations conferred or imposed on the original party. It does not permit bifurcation of the nature suggested.

In these circumstances, in my opinion the primary judge was in error in concluding that PTL was the successor to NPC within the meaning of cl 19.9 of the Joint Venture Agreement.

I have set out the grounds contained in the notice of contention at [12] above. So far as ground 1 is concerned, the expression “NPC” in the Joint Venture Agreement could only include PTL if the effect of the nomination under the Option Agreement was to constitute PTL as a successor within the meaning of cl 19.9. For the reasons I have given, it does not.

Ground 2 as argued was based on the proposition that NPC was entitled to recover PTL’s loss on its behalf. I have dealt with this argument in dealing with NPC’s cross-appeal. For the reasons I have given, it has not been made out.

Ground 3 was expressly based on PTL being the successor to NPC. As I indicated, it was not a successor.

It follows that the primary judge was in error in making the award of damages in favour of PTL.

I have set out the grounds of the cross-appeal at [11] above. It is convenient to deal with the grounds in the order in which they were dealt with in NPC’s written submissions.

At the hearing, NPC claimed it suffered loss as a result of the failure of the Council to provide an indemnity pursuant to cl 7.2 and cl 15.1(b) of the Joint Venture Agreement in respect of the cost of the removal of the contaminated material on the PTL Land. It was not contended that NPC paid for the cost of the removal of the contaminated material or that it was liable to reimburse PTL for such cost. Rather, it was asserted that it suffered loss in that the cost incurred by PTL in remedying the land was money which would otherwise have been paid by PTL to NPC, either as a result of return of capital, payment of dividends or on a winding-up. Alternatively, it was submitted that the value of NPC’s shareholding in PTL was diminished.

In its written submissions, NPC relied upon the evidence of Mr Allen to which I have referred at [47] above. It was submitted that the claim depended simply on the construction of the indemnities, and its claim was not precluded by the reflective loss principle because its claim was independent of PTL’s rights and did not in substance belong to PTL.

At the hearing, Senior Counsel for NPC submitted that the effect of the Joint Venture Agreement was that the Council by virtue of the warranties and indemnities had agreed to bear the cost of remedying contaminated land. He submitted that in practical terms, the parties knew the land might be acquired by a third party with some connection to NPC. He submitted it was plain that the loss had been suffered by NPC because of the contamination of the land, in this case “because it exercised the Option and put someone else in as the owner”. He submitted that the identity of the corporation which undertook the development work was completely irrelevant, although he accepted that the indemnities would have no application if an unrelated third party undertook the work without any recourse to NPC.

NPC rejected the proposition that the reflective loss principle included the recovery of damages of the nature of those claimed. In written submissions, it was contended that the diminution in value of shareholding in a company constitutes actionable loss to the shareholder, and the shareholder may sue where the company has no cause of action. At the hearing, Senior Counsel for NPC pointed to the fact that on the Council’s case, PTL could not sue. He submitted that NPC had undoubtedly suffered a loss of some description. He submitted the only issue was whether the loss fell within the contractual definition.

Senior Counsel for NPC also submitted that it was reasonably foreseeable that a company related to NPC would exercise the Option.

In dealing with the reflective loss principle, Senior Counsel for NPC, referring to the decision of this Court in Chen v Karadonis [2002] NSWCA 412 (“Chen”) at [39], submitted that the reflective loss principle had been accepted in this country, but drew the distinction between merely reflective loss or whether there was a reflective loss arising from the wrongdoing of the tortfeasor which was not recoverable by the company. He submitted that the basis of the principle was the prevention of double recovery. He also referred to the decision of the Queensland Court of Appeal in Thomas v D’Arcy [2005] 1 Qd R 666; QCA 068 (“Thomas”) at [9]-[11] where McPherson JA stated that the reflective loss principle was driven by policy considerations, but there was no doubt a shareholder may sue and recover for a loss he or she has suffered arising out of a separate legal wrong done to him or her but not to the company.

In written submissions in reply, NPC emphasised the width of the indemnities, submitting that whilst they are to be read contra proferentem, the surrounding circumstances can be taken into account, and the contra proferentem rule is a rule of last resort.

It was pointed out that the warranties and indemnities were concerned with the state of the PTL Land as well as the Car Park Land and reflected the agreement by Council to take the risk of contamination on the land.

It was submitted that the damages were exactly equal to the expense incurred and there was no basis for concluding that the proceeds might have been applied to collateral ends or lost in their entirety.

Referring to the evidence of Mr Allen, it was submitted that the obvious inference was that, but for the Council’s breach, the net profit would have been paid by PTL to NPC. It was submitted that no evidence was adduced which impugned that inference, and it was not for NPC to displace every possible contingency. Referring to what was said by Giles JA in Tyco Australia Pty Ltd v Optus Networks Pty Ltd (2004) NSWCA 333 (“Tyco Australia”) at [246], it was submitted that the presumption against the wrongdoer in Amory v Delamirie (1722) 93 ER 664 (“Amory”) extends to where a defendant has thrust the plaintiff into a difficult task of proving a past hypothesis. So far as the Agreement with PTL Holdings was concerned, reliance was placed on the evidence of Mr Allen that the Agreement did not proceed and that PTL Holdings did not make any contribution to the Project.

Senior Counsel for the Council submitted that the claim in respect of the easement was not covered by the indemnities if PTL was not a successor of NPC. He pointed out that the provision that governed the easement claim was cl 4.1(a)(iii) of the Joint Venture Agreement, which obliged the Council to create such easements as requested by NPC acting reasonably. He pointed out that NPC did not request the easement, rather it was requested by PTL, and if PTL was not NPC’s successor then cl 4.1(a)(iii) was not engaged. This proposition did not appear to be disputed by NPC either in written submissions or at the hearing. Indeed, at the hearing Senior Counsel for NPC appeared to accept that it was correct.

Senior Counsel for the Council submitted that there were two difficulties with the claim. He submitted the first was that any diminished dividend (or loss of the nature claimed) was not within the scope of the indemnities, and second, the proposition that the relevant amount of lost dividends or capital is the same as PTL’s loss has not been made good.

In its written submissions, the Council described the reflective loss principle as being that where a company has suffered a loss, a shareholder cannot recover a sum equal to the diminution in market value of his or her shares or a diminution in dividend because such a loss is merely a reflection of the loss suffered by the company. It was submitted it cannot be outflanked by describing the claim as a claim for payment pursuant to contractual indemnities. It accepted, however, that the principle did not apply where the company suffers loss, but where it has no cause of action and the shareholder had a cause of action.

However, at the hearing Senior Counsel for the Council submitted that the exception had not been conclusively established in this country. He submitted that it should not be accepted because the exception remains incoherent for the reason that if one accepts that the loss is suffered by the company then that is not the loss of the shareholder. Second, he submitted it should not be applied unless the Court is positively satisfied that the company had no cause of action, including a cause of action which may have become statute barred. He submitted the onus was on the shareholder claiming the loss to prove that that was the case.

It was submitted that the indemnities did not extend to the loss claimed as it was not a loss incurred in respect of any contamination existing on the land. It was submitted that whilst the words “in respect of” have a wide meaning, they must ultimately be construed in context and having regard to the purpose for which the indemnities were given, with any doubts to be resolved in favour of the indemnifier.

Senior Counsel for the Council submitted that the warranties in cl 7.2 of the Joint Venture Agreement had to be read in the context of cll 7.1 and 7.4. He described cl 7 as a regime of warranties and indemnities which operate together, given in consideration of the obligation to undertake the works. He submitted, referring to cl 7.4, that they were given to NPC alone in the context where cl 23.3 of the Joint Venture Agreement provided that NPC would pay and bear the Project Expenses which, by definition, did not include the cost of remediation of contaminated land. He submitted that cl 7.2 could not apply where NPC suffered loss not because it was the developer, but where someone else was the developer and NPC just happened to suffer loss because it was a shareholder. He submitted that the same approach applied in relation to the indemnity in cl 15.1(b) of the Joint Venture Agreement.

Senior Counsel for the Council emphasised that the obligation on NPC was not only to manage the project but to construct it. He referred to cl 2.2 of the Joint Venture Agreement and submitted that whilst NPC could use consultants, ultimately it was NPC who was required to carry out the works, supervise their carrying out, and incurring the expense involved in so doing.

So far as damages were concerned, he submitted that the evidence of Mr Allen was irrelevant because the fact that Mr Allen had a particular intention in 2015 did not prove that NPC would receive the entirety of the surplus when PTL was wound-up. It was submitted there remained a possibility that the proceeds would be put to some other use.

So far as the reliance placed by NPC on the decision of Giles JA in Tyco Australia, Senior Counsel for the Council submitted that the judge in that case was dealing with a past hypothetical, in contrast to the present case which he described as a “future actuality”.

He further submitted, referring to the decision of the Supreme Court of the United Kingdom in Marex Financial Ltd v Sevilleja [2021] AC 39; [2020] UKSC 31 (“Marex”), that it cannot be inferred that something taken off the expense line in 2015 is going to be directly reflected in the value of the shares.

Senior Counsel for the Council also submitted that there was a third problem, namely the Agreement with PTL Holdings. However, the evidence of Mr Allen that that joint venture was not proceeded with was not challenged.

What has been described as the reflective loss principle articulated by the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (“Prudential Assurance”) at 223-224 (the principle) is that where loss is suffered by a company as a result of wrongdoing in respect of which each of the company and the shareholder has a cause of action, a shareholder cannot sue to recover the diminution in the value of his or her shares (or loss of benefits associated with his or her shareholding) resulting from the loss suffered by the company. The rationale for the principle has been described as the prevention of double recovery (Prudential Assurance at 222; Johnson v Gore Wood & Co [2002] 2 AC 1 (“Johnson”) at 62-63, 66-67 per Lord Millett, Lord Goff agreeing), or on the basis that the shareholder does not suffer a loss distinct from the company and the shareholder is barred from pursuing the claim by the principle in Foss v Harbottle (1843) 2 Hare 461 (“Foss v Harbottle”) (Marex at [10] per Lord Reed PSC, Lady Black and Lord Lloyd-Jones JJSC agreeing), or perhaps because the shareholder has no legal or equitable interest in the company’s assets (Marex at [80] per Lord Reed PSC).

In Johnson, the House of Lords affirmed the principle. Lord Bingham set out the principle at 35 in the following terms:

Lord Millett, with whom Lord Goff agreed, would have extended the principle further to include barring of claims by creditors in circumstances where both the creditor and the company would have claims against the wrongdoer in respect of a loss suffered by the company. By contrast, Lords Hutton and Cooke expressed some reservations as to the operation of the principle.

The principle is not uncontroversial. In Marex, Lord Sales JSC, with whom Lord Kitchin JSC and Baroness Hale agreed, rejected it, declining to follow Prudential Assurance and Johnson (see Marex at [142]–[143] and [194]; see also Christensen v Scott [1996] 1 NZLR 273; Barings plc v Coopers & Lybrand [1997] 1 BCLC 427).

It should be noted that in Marex, both the majority and the minority rejected the approach of Lord Millett in Johnson to the extent that his Honour concluded that the principle extended to persons other than shareholders having claims against the company. Lord Reed stated the position in the following terms:

Lord Sales, who declined to follow Prudential Assurance, emphasised that the shareholder’s loss was not necessarily co-extensive with the loss of the company, making the following remarks which are of particular relevance to the manner in which the claim is put in the present case:

Ultimately, the majority in Marex accepted the formulation of the principle by Lord Bingham in Johnson to which I have referred at [104] above. (See Marex at [89] and [95]).

In Gould v Vaggelas (1985) 157 CLR 215; [1985] HCA 75, the appellants claimed that they were induced by misrepresentations made by the respondent vendor to purchase a tourist resort on behalf of a company to be formed and controlled by them, and to give guarantees and security for the unpaid portion of the purchase price. The appellants claimed damages for deceit, the company having failed and been wound-up. Chief Justice Gibbs accepted the principle in Prudential Assurance, stating the position at 219 in the following terms:

Chief Justice Gibbs held that the loss suffered as a result of the appellants’ alteration of position in reliance on the misrepresentation was recoverable. His Honour also stated that although the appellants would be required to set-off against the claim the value of their interest in the company, in the case in question, that interest was worthless. His approach bears some similarity to the approach of Lord Sales in Marex, to which I have referred at [108] above.

Justice Wilson (at 245–246) stated that the case bore no analogy to Prudential Assurance as the appellants had suffered personal loss in making their property available to the company to enable it to complete the purchase.

Justice Brennan (at 257–259) adopted the same approach. His Honour made the following remarks:

This analysis was approved by Lord Sales in Marex at [205].

In Thomas, McPherson JA accepted the principle, stating at [11] that it was driven by policy considerations. His Honour accepted that the plaintiff could sue for damages separate and distinct to those suffered by the company, but could not recover diminution in the value of his shareholding (see Thomas at [9] and [20]–[21]; Williams JA and White J agreeing at [24] and [37] respectively).

In Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450; [2010] FCA 472 (“Mercedes Holdings”), Perram J accepted that the principle applied. His Honour concluded, referring to the remarks of Lord Millett in Johnson, that the principle was associated with the maintenance of capital. His Honour concluded that the principle did not have any application outside the context where there exists a prohibition on an unauthorised capital reduction (see Mercedes Holdings at [112]; see also Ballard v Multiplex Ltd [2008] NSWSC 1019; (2008) 68 ACSR 208 at [32]–[41]).

In Chen, the Court accepted that the principle applied without any detailed consideration of its basis or the scope of its application.

In the present case, neither of the parties contended that the approach of Lord Sales in Marex should be adopted. However, as I indicated, the Council contended that the exception to the principle, namely that the shareholder could recover for loss to the value of his shares in the company as a result of damage suffered by the company where the shareholder had a cause of action but the company did not (Lord Bingham’s second point: see [104] above), should not be accepted.

I am unable to agree. There seems to be no reason for the principle to apply to circumstances where the company has no cause of action to recover the loss. This is so regardless of the rationale of the principle. If the purpose is to prevent double recovery, there is no prospect of double recovery where the company has no cause of action. If is as I conceive it, the principle is based on the rule in Foss v Harbottle that only the company can sue for a wrong done to the company, the principle is not outflanked because there is no actionable wrong done to the company, the company having no cause of action. If, as Perram J suggests, it is associated with the doctrine of maintenance of capital, there is no reduction of capital if a shareholder recovers funds that the company as a matter of law cannot recover. Finally, there is no policy reason not to impose such an exception.

In these circumstances, as PTL has no cause of action, NPC can sue to recover the loss it alleges it has suffered if first it can establish that the indemnities extend to such a loss, and secondly, whether the evidence establishes that the loss alleged was in fact suffered.

I have set out the indemnities at [27] and [29] above. The indemnity in cl 15.2 only applies if there is a breach by one of the parties of their obligations under the Joint Venture Agreement. The only obligation said to be breached was the failure to indemnify NPC in respect of the cost of remedying the contamination. The question then is whether there has been a failure to indemnify NPC as required by cl 7.2 of the Joint Venture Agreement.

The obligation in cl 7.2 is to indemnify NPC against any loss, liability, cost, claim or expense suffered or incurred in respect of any contamination existing on the land. There has been no claim against NPC in respect of the contamination, nor has NPC suffered or incurred any liability, cost or expense in respect of it. The question is whether the claimed diminution of the value of its interest in PTL is loss suffered in respect of contamination existing on the land.

I do not think that the indemnity extends to loss of the nature of that claimed in the present case. Although the words “loss” and “in respect of” are wide, they must be read in the context of the Joint Venture Agreement as a whole. This was the approach taken to the construction of indemnity clauses in both Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; [2004] HCA 28 (“Andar”) at [24]–[29] and Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44 (“Bofinger”) at [56]–[68] (see, in the statutory context, Commissioner for Taxation v Scully (2000) 201 CLR 148; [2000] HCA 6 at [39]; R v Khazaal (2012) 246 CLR 601; [2012] HCA 26 at [31]). Further, if ambiguity remains after the application of the usual principles of construction, the provision is to be construed in favour of the indemnifier (Andar at [17]–[29]; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; [1987] HCA 15 at 561). As was pointed out in Bofinger at [53], “doubt may arise not only from the uncertain meaning of a particular expression but from its apparent width of possible application.”

In the present case, I do not consider that the indemnity extends to the loss claimed. As I indicated, in dealing with the successor issue it was not contemplated that a nominee under the Option Agreement would succeed to the obligations of NPC under the Joint Venture Agreement, which include the obligation in cl 2.1(b) to discharge obligations in respect of the Project and, importantly, the obligation in cl 5.1(a) to manage the Project in accordance with the Project Documents. It would seem to me that it was not contemplated in those circumstances that the Project would be undertaken by anyone other than NPC. This is reinforced by the fact that there is an express prohibition in cl 19.9 against the assignment of obligations under the Joint Venture Agreement.

In that context, it does not seem to me that the indemnity would extend to circumstances where NPC suffered loss by virtue of the diminution in value of its shares it held in its nominee as a result of the nominee incurring the costs of remedying the contamination. If the indemnity extended to those circumstances, it would extend not only to a case where a wholly owned subsidiary of NPC was nominated under the Option Agreement, but also to a case where any nominee in which NPC was a shareholder incurred the costs, thereby diminishing the value of NPC’s shareholding. It does not seem to me that such a result was intended by the parties.

I have reached that conclusion without recourse to the contra proferentem rule. I accept that it is a rule of last resort (see, for example, Rava v Logan Wines Pty Ltd [2007] NSWCA 62 at [51]–[56]). However, to the extent that it could be said that any ambiguity remains after a consideration of the matters to which I have referred above, that ambiguity falls to be resolved in favour of the Council as indemnifier.

Even if NPC, contrary to my opinion, was entitled to a claim for loss of the value of the shareholding in PTL, it has not succeeded in establishing any such loss.

NPC’s claim is based on the assumption that its loss can be equated to the cost of PTL remedying the contamination. Its contention is that the surplus from the development would have been greater had PTL not been required to meet that cost, and such surplus would have been returned to NPC. In that regard, reliance is placed on the evidence of Mr Allen to which I have referred at [47] above.

There are a number of difficulties with this approach. First, if this was Mr Allen’s intention in 2015 there is nothing to show that it has been put into effect. Mr Cochrane’s evidence was that the strata plan in respect of the development was registered on 28 July 2017, and by early 2017 contracts had been exchanged on most of the units the subject of the development. He also stated that the contracts provided for settlement within 14 to 21 days after notification of registration of the strata plan. Although the list of settlements exhibited in Mr Cochrane’s affidavits was not reproduced on the appeal, it can be inferred the Project was completed by no later than the end of 2017. This is supported by the summary of bank statements annexed to NPC’s closing submissions in the Court below, which demonstrate the ANZ Bank’s financing was repaid by 22 August 2017.

Notwithstanding this, there is no evidence that Mr Allen’s intention was put into effect in the supervening years. If it had occurred or was in the process of occurring, it would have been a relatively simple matter for NPC to put on evidence that it had in fact been carried out. However, absent such evidence, there is no basis for assuming that it has occurred.

Further, absent such evidence, it does not seem to me that it can be said there is a direct correlation between the amount paid by PTL to remedy the contamination and the loss of value of NPC’s shareholding. The difficulties with this approach were well set out by Lord Sales in the passages from his judgment in Prudential Assurance to which I have referred at [108] above.

It may be that if it were established that PTL was a cashbox holding only the surplus of the development with no liabilities, it would be possible to value the shares of NPC as equivalent to the value of those assets (subject to tax and liquidation expenses). However, there is no evidence to suggest that NPC was a cashbox in that sense.

NPC sought to overcome this difficulty by relying on the principle in Armory (see [91] above). However, this is not a case where the conduct of the Council caused any difficulty to NPC in proving its case. It would have been a relatively simple matter for NPC to adduce evidence to establish the value of its shareholding in PTL. However, it has failed to do so.

For these reasons, these grounds of appeal have not been made out.

NPC relied on the principle said to be derived from the speech of Lord Browne-Wilkinson in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martins Property Corporation Ltd v Sir Robert McAlpine Ltd [1994] 1 AC 85 (“Linden Gardens case” and “St Martins Property Corporation case” respectively; “Linden Gardens” collectively).

In the Linden Gardens case, the owner of a leasehold interest in property entered into a building contract to remove blue asbestos. The owner assigned its leasehold interest to Linden Gardens and also purported to assign its interests in the building contract to that company. This was done without the consent of the builder. Prior to the assignments, the builder had breached its contract by failing to remove all the asbestos. Linden Gardens acquired the leasehold on the assumption the asbestos had been eradicated. The question was whether Linden Gardens could recover from the builder notwithstanding it was not a party to the agreement.

In the St Martins Property Corporation case, the appellant had agreed with the local council to develop a significant site in London (the Development Contract). In order to undertake the development, the appellant entered into a building contract with the respondent. By a scheme of arrangement, the right of the appellant to develop the property was vested in a subsidiary. The appellant purported to assign its interests in the building contract to the subsidiary without the consent of the builder. In this case, subsequent to the assignment, the builder breached the contract.

Lord Browne-Wilkinson, with whom Lord Keith, Lord Bridge and Lord Ackner agreed, held that in each case the assignment of the building contract was invalid. His Lordship held as a consequence that in the Linden Garden case the original owner of the leasehold was entitled to claim damages for the breach, the breach having pre-dated the assignment of the leasehold interest.

In the St Martins Property Corporation case, Lord Browne-Wilkinson held that although the breach had occurred after the development contract had vested in the subsidiary, St Martins Property Corporation was entitled to recover that loss.

In reaching that conclusion, and after referring to the speech of Lord Diplock in The Albazero [1977] AC 774 at 846, his Lordship reached the following conclusion (at 114–115):

In written submissions, referring to the judgment of Lord Sumption in Swynson Ltd v Lowick Rose llp (in liq) [2018] AC 313; [2017] UKSC 32 (“Swynson”) at [14], NPC submitted that the principle applied when the object of the transaction was to benefit a third party and the anticipated effect of a breach would be to cause loss to that third party. It was submitted that the principle was cited with approval by McClure JA in Rio Tinto Exploration Pty Ltd v Graphite Holdings Pty Ltd [2007] WASCA 276 (“Rio Tinto”) at [41].

Senior Counsel for NPC submitted that the doctrine applied to ensure that a third party who was known or intended to be a person who would acquire the property not be put out of pocket to avoid a “legal black hole”.

The Council in its written submissions submitted first that the line of authority relied upon was not engaged as the claim was a claim for an indemnity, not a claim for breach of contract. I do not think that this distinction is determinative of the issue. The claim in substance is a claim for a breach of a contractual obligation to indemnify NPC against loss from contamination.

It was also submitted that the principle has not been applied in this country and should not be applied.

Third, it was submitted that the appellant in the St Martins Property Corporation case was permitted to recover damages because it was anticipated that the property would be purchased by a later owner and a breach of the contract would cause damage to that later owner, not just the original developer. It was submitted in the present case it was not contemplated that anyone other than NPC would develop the land.

In reaching the conclusion to which I have referred at [139] above, Lord Browne-Wilkinson extended what was said by Lord Diplock in The Albazero concerning commercial contracts for the supply of goods to building contracts. Lord Diplock’s remarks were in the following terms (The Albazero at 847):

It should be noted that Lord Diplock’s formulation was predicated on the basis that it was the intention of both contracting parties to treat the contract as being for the benefit of all parties who may acquire an interest in the goods. The remarks by Lord Browne-Wilkinson seem to be based on the same assumption. This is consistent with the approach taken by Lord Sumption in Swynson to which I referred at [141] above.

However, in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (“Alfred McAlpine”), Lord Clyde at 530 expressed the view that the solution to the problem was imposed by law, not from the presumed intention of the parties. His Lordship explained his conclusions in the following terms (at 535):

Lord Jauncey took the view that the contracting parties’ rights to substantial damages in circumstances where the loss was suffered by a third party depended on whether the contracting party has made good or intends to make good the effect of the breach (Alfred McAlpine at 574). Lord Goff in dissent expressed the view that an employer under a building contract may in principle recover substantial damages for breach of that contract, notwithstanding the property was vested in a third party which in fact suffered the loss (Alfred McAlpine at 547). His Honour expressed the view that it was not necessary that the employer expended the money necessary to remedy the breach or had undertaken a liability to do so (see Alfred McAlpine at 546–549).

It is unnecessary to deal with the analysis that underpinned the divergent views reached by their Lordships. What it does demonstrate is that even in the United Kingdom where the principle is recognised, there is a divergent view as to its juridical basis and its scope.

NPC pointed out that McClure JA in Rio Tinto cited Linden Gardens as an exception to the rule that a plaintiff who suffers no loss as a result of breach of contract is only entitled to nominal damages (see Rio Tinto at [41]). Her Honour held that the principle did not apply in that case.

It is well established in this country that in circumstances where a contract imposed an obligation on the promisor to confer a benefit on a third party, the promisee can seek an order that the promise be specifically performed (Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460; [1967] HCA 3 at 478 and 503; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; [1988] HCA 44 (“Trident”) at 119–120). It is also well established that where the promisee is a trustee of a promise for a third party, the third party can sue on the contract indirectly in an action in which the promisee is joined as the defendant (Vandepitte v Preferred Accident Corporation of New York [1933] AC 70; Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43; [1956] HCA 8 at 67). However, the proposition said to be established in Linden Gardens has not been accepted as part of the law in this country. In Trident, only Brennan J referred to The Albazero, and his Honour did not do so in terms which adopted the principles set out by Lord Diplock.

I do not think the present case falls within the principle enunciated in Linden Gardens, at least as expressed by Lord Browne-Wilkinson. As I indicated in dealing with grounds 1A, 2 and 3 of the cross-appeal, it was not contemplated that the work on the Project, including the work on the PTL Land, would be carried out by any corporation other than NPC. In those circumstances, the principle as enunciated by Lord Browne-Wilkinson has no application. It is not necessary in those circumstances to determine whether the principle does form part of the law in this country, cf J D Heydon, Heydon on Contract (Thomson Reuters, 2019) [12.170]. So far as any further extension of the principle is concerned, it seems to me that it is not a step an intermediate appellate court should take.

In the circumstances, these grounds of appeal have not been made out.

In its submissions on this ground, NPC referred to the conclusion of the primary judge that the fact that PTL was a successor to NPC was sufficient to enable it to recover damages. It was stated that the primary judge did not elucidate why that was so, but that the conclusion was open having regard to the judgment of Einstein J in Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holdings AG [2004] NSWSC 149 (“Gate Gourmet”).

In Gate Gourmet, Einstein J sought to extend the exception to the doctrine of privity which Mason CJ and Wilson J in Trident at 123–124 held existed in the case of contracts of insurance to the beneficiary of a contract of indemnity who is not a party to the contract.

If PTL was a successor under clause 19.9 of the Joint Venture Agreement, there was, with respect, no need for recourse to cases such as Gate Gourmet to establish PTL’s title to sue because PTL would succeed to both the rights and obligations of NPC. However, as I have indicated, PTL was not a successor within the meaning of that clause.

To the extent the principle is relied on when in fact PTL was not a successor, it is not appropriate, in my view, for an intermediate appellate court to extend what was said in Trident beyond contracts of insurance. This is particularly the case when only a minority of the High Court in Trident supported the extension.

It follows this ground of appeal has not been made out.

If the indemnity was given for the benefit of PTL then it may well be that NPC could obtain an order in the nature of specific performance that the Council indemnify PTL for the cost of remedying the contamination. However, as I have pointed out, the indemnity was not for the benefit of PTL. In these circumstances, there is no right to an order for specific performance.

In the result I would make the following orders:

MACFARLAN JA: I agree with Bathurst CJ.

GLEESON JA: I agree with Bathurst CJ.