CIC Projects Pty Ltd v Eyre Kingston Pty Ltd

1. [1]

   HIS HONOUR: This construction suit, which was given a high degree of expedition in the Commercial List, concerns a clause in a written Co-owners Agreement (the Co-owners Agreement) dated 18 June 2015 between the first defendant (EK or the Developer) and the second defendant (DTM). The plaintiff (CIC) has a 50% interest in EK, and DTM, through its subsidiary Griffin Q Pty Ltd (Griffin Q), the third defendant, has the remaining 50% interest in EK. CIC and Griffin Q each have two nominated directors on the board of EK.

2. [2]

   EK is the vehicle through which CIC and DTM have developed land in the suburb of Kingston in Canberra, ACT. The development, known as Atria, comprises a commercial retail component (which includes a Supabarn Farmers Market) and a basement carpark (Commercial Component), and a residential component of 142 apartments with private podium parking (Residential Component).

3. [3]

   On 8 July 2015, CIC, Griffin Q, and EK entered into a written Development Agreement (the Development Agreement) which governs their relationship as shareholders in EK.

4. [4]

   The overall intended commercial outcome of the project (the Project) is that on its completion the Commercial Component will become the sole property of DTM whilst the Residential Component will be sold.

5. [5]

   Land in the ACT is commonly held by way of crown lease. The land in this case is held, via crown leases, by EK and DTM as tenants-in-common as to 70% and 30% respectively. There is a crown lease for the Commercial Component and a separate crown lease for the Residential Component. Roughly, the Residential Component constitutes about 70% of the Project and the Commercial Component 30%.

6. [6]

   The division between the two components is to be effected by partitioning the land so that DTM becomes the sole registered proprietor of the Commercial Component and EK becomes the sole registered proprietor of the Residential Component.

7. [7]

   The Co-owners Agreement provides that within 14 days of practical completion EK and DTM must give effect to the partition and lodge transfers for registration with the land titles office. It provides that the Commercial Component will be retained by DTM following practical completion, however DTM must pay to EK the ‘Expenses incurred in carrying out the Commercial and Retail Works’ (the Expenses).

8. [8]

   It is common cause that the Project reached practical completion more than 14 days ago.

9. [9]

   The primary issue dividing the parties is whether, on the proper construction of the Co-owners Agreement, the partition is to occur only if DTM pays EK the Expenses. EK argues that DTM is not entitled to become the sole registered proprietor of the Commercial Component unless it pays the Expenses. DTM argues that its entitlement to partition is not dependent or conditional upon it paying the Expenses.

10. [10]

    The subsidiary issue is whether the Court should make orders directing Griffin Q to procure that its nominated directors on the board of EK resolve to determine allocations between DTM and EK of amounts comprising the Expenses or to refer such determination to the parties’ Quantity Surveyor. It seeks an order that upon partition of the land and transfer of the Commercial Component to DTM, DTM must pay the determined Expenses.

11. [11]

    For its part, DTM seeks a declaration that under the Co-owners Agreement partition is not dependent or conditional upon payment of the Expenses, together with a decree for specific performance requiring partition to be effected.

MATERIAL PROVISIONS OF THE CO-OWNERS AGREEMENT

1. [12]

   Under cl 3.2 of the Co-owners Agreement, EK is responsible for arranging funding for the Project. Under cl 3.3, EK and DTM agree that they must make the land available free from any encumbrance so that it may be offered as mortgage security for borrowings. Under cl 4.1, they acknowledge that EK has been or will be appointed the Developer.

2. [13]

   Clause 4.2 of the Co-owners Agreement provides:

3. [14]

   Clause 4.3 of the Co-owners Agreement provides:

4. [15]

   Clause 4.6 of the Co-owners Agreement provides:

5. [16]

   Under cl 1.1:

MATERIAL PROVISIONS IN THE DEVELOPMENT AGREEMENT

1. [17]

   Under cl 1.1 of the Development Agreement:

2. [18]

   Clause 4.5 of the Development Agreement provides:

3. [19]

   Clause 5.3 of the Development Agreement provides:

4. [20]

   Schedule 1 provides relevantly:

5. [21]

   Each item in the Schedule was referred to by the parties as a ‘Row’. I have inserted the Row numbers which they used.

THE COMMONWEALTH BANK FACILITY

1. [22]

   On 14 March 2019, the board of directors of EK met to discuss a debt facility with the Commonwealth Bank of Australia (the Bank). The meeting approved the execution of facility documents. The minutes of the meeting include the following:

2. [23]

   On 25 March 2019, EK entered into a facility agreement with the Bank which provided a borrowing facility with a limit of $57,320,000 for the purpose of constructing the Project. DTM was a guarantor to the Bank of EK’s obligations under the facility. Peet Limited, the ultimate holding company of CIC, was also a guarantor, but only for cost overrun up to a maximum of $1,800,000.

3. [24]

   Clause 21.5 of the facility agreement provides:

THE DEED OF AGREEMENT

1. [25]

   On 28 March 2019, CIC, Griffin Q, and EK entered into a Deed of Agreement. Recital D recorded that:

2. [26]

   The Deed of Agreement defined the Construction Contract to be a contract between EK, Construction Control Australia Pty Ltd, and DTM dated 13 August 2019.

3. [27]

   Clauses 2.1(a), (b), (c) and (f) of the Deed of Agreement provide:

4. [28]

   Clause 2.2 of the Deed of Agreement provides:

A DISPUTE EMERGES

1. [29]

   Prior to 21 April 2020, there were discussions between representatives of EK and DTM concerning the timing of DTM’s contribution to the construction price under the Construction Contract and other expenses. A difference emerged as to when DTM was obliged to pay.

2. [30]

   On 21 April 2020, DTM’s solicitors, Thomson Geer, wrote to EK stating that DTM was willing to make payment of the $24,316,595 (excluding GST) of the Contract Price on the date of completion of the first sale contract for the completed residential units in the Residential Component and that it would ‘make its contribution to any other expenses any other “Expenses” allocated to the Commercial Component when that allocation and amount of such contribution is determined in accordance with the terms of the Development Agreement (as varied); namely, failing agreement between the parties, as determined by the quantity surveyor at the completion of the Project’. [Emphasis in original]

3. [31]

   On 8 July 2020, Peet Development Management Pty Ltd (Peet), a company associated with CIC which EK had appointed to provide development management services for the Project, wrote to EK. At that time, the Project was apparently scheduled to reach practical completion on or about 20 July 2020. Peet recorded that it maintained books of accounts and financial records for EK which included the proportion of Expenses allocated between the Residential Component and Commercial Component.

4. [32]

   Peet provided its estimate of the Expenses associated with the Commercial Component to be paid by DTM. It estimated those Expenses (including the $24,316,595) at $35,498,275.

5. [33]

   Peet’s letter concluded with the following:

6. [34]

   On 1 October 2020, CIC’s solicitors, HWL Ebsworth, wrote to EK expressing its concern that DTM did not intend to meet its obligations under the Co-owners Agreement to pay the Expenses associated with the Commercial Component at the agreed time.

7. [35]

   The solicitors asserted that on the proper construction of cl 4.2(e) of the Co-owners Agreement, a precondition to partitioning, and execution of the relevant transfers, was that DTM must pay the Expenses incurred in carrying out the Commercial and Retail Works as determined in accordance with the Development Agreement and certified by EK.

8. [36]

   They sought an undertaking within seven days from DTM and Griffin Q not to take any steps towards the partitioning and transferring of the land such that DTM becomes the sole registered proprietor of the Commercial Component until the issues surrounding the Expenses were resolved by the parties or a Court.

9. [37]

   They also sought confirmation that EK would certify Expenses incurred in carrying out the Commercial and Retail Works, including: all Commercial Component-only Expenses (Row 4); the $24,316,595 (excl. GST) already determined under the Deed of Agreement; and an allocation of other Expenses incurred in respect of the Commercial Component and Residential Component (Row 6).

10. [38]

    They also sought confirmation that if agreement could not be reached at board level on the ‘row 6’ Expenses, EK would direct the quantity surveyor to make a determination as a matter or urgency.

11. [39]

    They foreshadowed commencing legal proceedings.

12. [40]

    The undertakings and confirmation sought were not forthcoming.

13. [41]

    On 6 November 2020, the Bank gave notice to EK, DTM, and Peet Limited that it was of the view that EK had committed a Default under the Facility Agreement by not effecting partition of the land under cl 4.2 of the Co-owners Agreement within 14 days of practical completion. The Bank reserved its rights.

14. [42]

    On 22 October 2020, CIC initiated these proceedings by suing out a Summons and accompanying Technology and Construction List Statement.

15. [43]

    On 29 October 2020, at a board meeting of EK, the directors nominated by CIC proposed resolutions for the certification of the amount of Expenses incurred in connection with the Commercial Component. The resolutions failed to pass.

16. [44]

    On 30 October 2020, Thomson Geer wrote to HWL Ebsworth and EK giving CIC and EK notice that unless by 10am on Thursday 5 November 2020 DTM and its directors were restrained by Court order, DTM's directors, in their capacities as the Defaulting Party's attorneys, would exercise their powers of attorney to, without limitation, give effect to the transactions contemplated by cl 4.2 of the Co-owners Agreement without further notice.

17. [45]

    On 4 November 2020, CIC moved the Court for an interim injunction restraining exercise by DTM’s directors of the powers of attorney in cl 4.2 of the Co-owners Agreement. Stevenson J, sitting as Duty Judge in the Technology and Construction List, granted the injunction on 6 November 2020. His Honour extended the injunction until 11 November 2020 and fixed the matter for final hearing on that day before me.

18. [46]

    On commencement of the hearing, I extended the injunction until I give judgment. Having regard to the outcome, the injunction will be dissolved.

THE CLAIMS AND CROSS-CLAIMS

1. [47]

   EK is in a state of deadlock. CIC cited it as the first defendant but sought an order under s 237 of the Corporations Act 2001 (Cth) that it be given leave to commence and prosecute these proceedings on its behalf. At the hearing, Counsel for DTM put that an order was unnecessary because DTM accepted that CIC had standing to seek the substantive relief it seeks in the proceedings and made it clear no point to the contrary would be taken. The hearing proceeded on that basis.

2. [48]

   CIC seeks a declaration that cl 4.2(e) of the Co-owners Agreement, properly construed, requires the payment by DTM of Expenses incurred in carrying out the Commercial and Retail Works at the time of, and is interdependent on, the partition of the Land as contemplated by cl 4.2(d) of the Co-owners Agreement.

3. [49]

   In the alternative, it seeks a declaration that properly construed, the obligation to partition the Land imposed by cl 4.2(d) and 4.2(e) of the Co-owners Agreement is conditional upon the contemporaneous payment of those Expenses by DTM to EK.

4. [50]

   CIC seeks an order that Griffin Q procure that its director representatives on the Board of EK resolve to determine the allocation between DTM and EK of amounts payable under the Construction Contract as required by clause 2.1(b) of the Deed of Agreement, or to refer such determination to Mr Mitchell Brandtman, Quantity Surveyor; and resolve to refer to determination Mr Mitchell Brandtman, Quantity Surveyor, the allocation of Expenses required by clause 2.1(f) of the Deed of Agreement.

5. [51]

   CIC seeks an order that, upon partition of the Land and the transfer of the Commercial Component of the Land to DTM, DTM is to pay to EK the Commercial Component Expenses, being the total of:

   1. (1)

      the Expenses incurred exclusively in connection with the Commercial Component; and

   2. (2)

      the Expenses incurred in connection with both the Commercial Component and the Residential Component, being:

6. [52]

   By cross-claim, DTM seeks a declaration that on the proper construction of cls 4.2(d) and 4.2(e) of the Co-owners Agreement, the obligation to partition the Land is ‘neither contingent upon nor interdependent with’ any obligation on DTM to pay the Expenses incurred in carrying out the Commercial and Retail Works.

7. [53]

   I will deal first with the issue whether cl 4.2(e) properly construed requires payment by DTM of Expenses incurred at the time of and is interdependent on the partition of the land, or makes the partition of the land conditional upon contemporaneous payment by DTM of those Expenses.

8. [54]

   The Co-owners Agreement, Development Agreement, and Deed of Agreement are commercial contracts which are to be given a business-like interpretation. Interpreting them requires attention to the language used by the parties, the commercial circumstances which they address, and the objects which it is intended they secure. The meaning of the words chosen is determined objectively by reference to its text, context, and purpose, the question being what a reasonable person would have understood them to mean. Preference is given to a construction supplying a congruent operation to the various components of the whole and so as to avoid commercial inconvenience. Where language is open to more than one construction, the Court will prefer a construction which avoids consequences which are capricious, unreasonable, inconvenient or unjust: see Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 at 109; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at 559 [82]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 528 [15]; Electricity Generation Corporation Ltd v Woodside Energy Ltd (2014) 251 CLR 640 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 117.

9. [55]

   The insuperable hurdle facing CIC is that, as Counsel for CIC accepted, cl 4.2(e) does not contain words which say either that partition of the land is dependent on the payment of the Expenses incurred in carrying out the Commercial and Retail Works or that partition is to take place no later than contemporaneously with payment of the Expenses. There are no words which give rise to a constructional choice, which includes interdependency or contemporaneity.

10. [56]

    There was some suggestion that this work could be done by the word ‘however’, but it says nothing of timing.

11. [57]

    CIC argues that interdependency or contemporaneity should be implied from a series of contextual matters and because not to imply it would lead to commercial inconvenience. However, absent a real constructional choice, contextual matters and commercial inconvenience do not assist CIC.

12. [58]

    CIC correctly did not argue for an implied term. The suggested term would not meet at least two of the necessary criteria for implying it, namely that it is necessary to give business efficacy to the transaction and that it is so obvious that it goes without saying: see Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 347.

13. [59]

    Although CIC did not so frame its argument, during discussion with the Court it was suggested that there might be an implied term that the Expenses had to be paid within a reasonable time and that a reasonable time was no later than on partition. The difficulty with this suggestion in the present context is that the Co-owners Agreement, read with the Development Agreement and the Deed of Agreement, does not require the Expenses to be paid earlier than completion of the Project. What would be a reasonable time might also require a factual inquiry, which is beyond the scope of CIC’s pleaded case.

14. [60]

    CIC accordingly fails on its contended construction.

15. [61]

    While it is not necessary to deal with the competing commercial considerations either in favour of or against interdependency or contemporaneity, I will do so on the hypothesis that, contrary to my conclusion, a constructional choice is available. My conclusion is that commercial considerations do not point to interdependency or to contemporaneity, nor do they work commercial inconvenience, capriciousness, unreasonableness, or injustice. Indeed, the commercial considerations point more in the opposite direction.

16. [62]

    The following features of cl 4.2 and the related suite of agreements undermine the argument that interdependency or contemporaneity was intended:

    1. (1)

       clause 4.2(e) requires partition within a finite period and then records that the Commercial Component will be retained. Retention implies that partition has already occurred. The provision then records that DTM must pay the Expenses, that is after partition has already occurred;

    2. (2)

       within cl 4.2, DTM confirms its intention to retain the Commercial Component on a long-term hold basis. This is more consistent with no interdependency or contemporaneity. EK has no commercial interest in whether or not DTM continues to hold the Commercial Component if DTM has already paid the Expenses, but it does if DTM gets the Commercial Component but has not yet paid;

    3. (3)

       clauses 2.1(b) and (f) of the Deed of Agreement refer to ‘completion of the Project’, and not to ‘Practical Completion’ (a defined term in the Co-owners Agreement), denoting a distinction between the two and, in my view, that completion of the Project (whatever that means) will inevitably happen later than ‘Practical Completion’; and

    4. (4)

       clause 2.1(b) provides for allocation between the Commercial Component and the Residential Component to be determined by the board or, failing that agreement, to be determined by the Quantity Surveyor on completion of the Project. Clause 2.1(f) provides for other Expenses incurred in connection with both components to be determined by the Quantity Surveyor on completion of the Project. The Deed of Agreement contemplates that these allocations and determinations may occur after Practical Completion and there is nothing to suggest that they will or must occur within 14 days after Practical Completion, which would have to be the case if partition must occur within those 14 days and is dependent upon payment of the Expenses.

17. [63]

    CIC argued that a number of commercial considerations support a construction which includes interdependency or contemporaneity. I shall deal with each in turn.

18. [64]

    First, it puts that the upfront land purchase cost and development cost was borne by EK, with the parties agreeing that it would ‘in essence’ be reimbursed once the Project was in a ‘useable state’. It puts that cl 4.2(e) (and the Development Agreement and Deed of Agreement) reflects agreement that once the development is complete, DTM would acquire the Commercial Component at cost price. The difficulty with this argument is that the provision does not include any reference to usable state or to the development being complete. It refers to Practical Completion. In this context, it is worthy of observation that DTM’s offer of 21 April 2020 to pay the $24,316,595 on the date of completion of the first sale contract gives a possibly generous construction to EK of ‘completion of the Project’.

19. [65]

    Second, it puts that part of the cost of the Project was funded by Bank debt, which is repayable progressively upon sale of the Commercial Component to DTM (the principal guarantor under the Facility Agreement) and settlement of the sales to purchasers of the residential units which it says is confirmed by the resolution passed by EK’s board at the time of entry into the Facility Agreement. CIC argues that the resolution is an admission to this effect. It submits that if the Commercial Component Expenses that are ascertainable are not paid on partition, EK may be in default of the Facility Agreement. There are a number of difficulties with this argument, not least of all that the clause makes no provision for progressive payment. If the resolution is an admission, it is not one by DTM. The Facility Agreement was entered into some four years after the Co-owners Agreement and cannot be used as an aid to its construction. Each party has its own commercial interests in the successful outcome of the Project and presumably in EK not falling into default of the Facility Agreement. DTM guaranteed a significantly greater portion of the borrowings than did Peet Limited. The Bank has already foreshadowed a possible default. There is nothing eccentric about the parties having left it to themselves to act in accordance with their assessment of their commercial interests.

20. [66]

    Third, it puts that given the need for regulatory approval, partition cannot practically occur until Practical Completion is achieved, which in turn can only occur if all of the Expenses necessary in carrying out the Commercial and Retail Works have been incurred. However, it is common cause that the Expenses have been incurred and that Practical Completion has been achieved.

21. [67]

    Fourth, it puts that because Practical Completion has been achieved, DTM has apparently leased (and is earning income from) the Commercial Component’s tenancies. This says nothing about the timing of DTM’s obligations to pay the Expenses. DTM would no doubt have seen it as being in its own commercial interests to pay the Expenses after it was earning income.

22. [68]

    Fifth, it puts that it is usual that payment for land is required upon its transfer, and not at some later time. It says that consistently with that usual experience, reimbursement of EK and repayment of the Bank debt for the Residential Component was to occur by way of unit sales and similarly, for the Commercial Component, it was to occur by DTM paying the relevant Expenses, given its intention to (upon partition and transfer) hold the Commercial Component on a long-term basis. These propositions are based on the supposed usual experience of unidentified persons. There is no evidence of such experience, and even if there was, usual experience has no role to play in a dispute about construction of a contract.

23. [69]

    Sixth, it puts that sensible business parties would not agree to a transfer of valuable land absent simultaneous payment, or a delayed payment with security. A commercially sensible party, acting in its own interests, might well seek this.

24. [70]

    Finally, it argues that EK will hold no security in respect of the Expenses owed to it by DTM if the land is partitioned and transferred to DTM without payment. It argues that Griffin Q and DTM's conduct to date suggests that this presents a real risk for EK. It is to be remembered that EK is a joint vehicle. Whatever commercial risks were undertaken by the parties is regulated by the agreements into which they entered. It is also to be remembered that EK obtained confirmation from DTM of its intention to retain the Commercial Component on a long-term hold basis.

25. [71]

    Under cl 2.1(b) of the Deed of Agreement, the parties agreed that the allocation between the Commercial Component and the Residential Component of other amounts payable under the Construction Contract, including any variations, would be determined by the Board or, failing that agreement, determined by the Quantity Surveyor on completion of the Project’. Under 2.1(f) they agreed that other Expenses incurred in connection with both the Commercial Component and the Residential Component would be determined by the Quantity Surveyor on completion of the Project.

26. [72]

    In cl 2.2 of the Deed of Agreement, CIC and Griffin Q undertook to procure that their representative Directors on the Board would promptly pass resolutions agreeing to the allocations specified in cls 2.1(a) to 2.1(c) inclusive. CIC seeks an order that Griffin Q specifically perform this obligation.

27. [73]

    It would be inappropriate to make such an order. Both cls 2.1(a) and 2.1(f) contemplate allocation or determination ‘on completion of the Project.’ Plainly, the parties distinguished between Practical Completion and completion of the Project.

28. [74]

    Project is defined in cl 1.2 of the Development Agreement to be:

29. [75]

    The evidence does not establish that the Project has been completed.

30. [76]

    In any event, any director considering a resolution could legitimately exercise a judgment that it has not. In that event, the order sought would be inutile.

31. [77]

    The summons is dismissed.

32. [78]

    The Court declares that on the proper construction of clauses 4.2(d) and 4.2(e) of the Co-owners Agreement between Eyre Kingston Pty Ltd and DTM Investments (ACT) Pty Ltd dated 18 June 2015, the obligation to partition the Land is neither contingent upon nor interdependent with any obligation on DTM to pay the Expenses incurred in carrying out the Commercial and Retail Works.

33. [79]

    The injunction granted on 6 November 2020 is dissolved.

34. [80]

    DTM originally sought an order that Eyre Kingston Pty Ltd specifically perform its obligations under clauses 4.2(d) and 4.2(e) of the Co-owners Agreement to take such steps and execute such documents as necessary to effect the partition of the Land contemplated by clause 4.2 of the Co-owners Agreement. Such an order is not necessary because DTM has available to it the power of attorney machinery in cl 4.3 of the Co-owners Agreement.

35. [81]

    I provisionally order the plaintiff to pay the costs of the second and third defendants. The order will solidify within seven days after this judgment unless a party notifies my Associate and its opponents in writing that some other order is sought, stating briefly the grounds, in which event the order will not take effect and directions will be made for the determination of costs and any other outstanding issues.