Altis PropCo2 Pty Ltd v Majors Bay Development Pty Ltd

1. [1]

   In these proceedings, the plaintiff, Altis PropCo 2 Pty Ltd (Altis 2), seeks to recover a deposit of $2,099,000 (together with interest) it paid under a contract dated 27 February 2020 (the Contract) by which it agreed to acquire from the defendant, Majors Bay Development Pty Ltd (MBD), 56 residential apartments (the Apartments) in a development in Mortlake, Sydney (the Majors Bay Development). Altis 2 claims that it validly rescinded the Contract following its failure to obtain a loan from Westpac Banking Corporation (Westpac) and is entitled to a return of the deposit in accordance with the Contract. MBD disputes that the Contract was validly rescinded.

Background

1. [2]

   Altis 2, which was incorporated to acquire the Apartments, is a wholly owned subsidiary of Altis Property Partners Pty Ltd (Altis). Altis carries on business throughout Australia as a property funds manager. As part of that business, it manages property portfolios on behalf of third-party investors in accordance with mandates it holds from those investors. Since 2019, it has held a mandate from entities associated with Kohlberg Kravis Roberts & Co LP (KKR) to invest funds in the Australian residential property market. Pursuant to that mandate it had acquired two buildings that formed part of a residential development in Melbourne (the Caydon Acquisition) and for that purpose had borrowed funds from the Bank of Melbourne, a subsidiary of Westpac.

2. [3]

   In late July 2019, Mr Marco Cunningham, who at that time was a capital transactions manager with Altis, was introduced to the potential acquisition of Apartments by an independent broker.

3. [4]

   The Majors Bay Development had been undertaken by MBD, a subsidiary of Holdmark Property Group Pty Ltd (Holdmark). It consisted of a large number of apartments spread across a number of buildings which were constructed in three stages. The proposal was that Altis would acquire all the remaining unsold apartments in the development at a significant discount to their list price. The acquisition was ultimately structured in a way which involved part of the purchase price being borrowed from Westpac, a bank with which KKR had an established relationship, KKR providing 90 percent of the balance of the purchase price in the form of subordinated loan notes and Altis providing the remaining ten percent. A similar structure had been used to make the Caydon Acquisition. It was anticipated that the Apartments would be leased, that the rent would be used to pay some or all of the interest costs and that the Apartments would be sold over a period of time at a profit. Plainly, the attractiveness of the investment depended on interest rates, the ability to lease the Apartments, the rent that would be obtained and movements in the Sydney residential property market over the following three to five years.

4. [5]

   Following inspections undertaken by Mr Cunningham and negotiations between the parties, on 24 October 2019, Holdmark and Altis executed a Heads of Agreement which described the “key terms” on which “the purchaser” would acquire the Apartments. At that stage the purchase price was contemplated to be $42,000,000. The settlement was expressed to be the earlier of five weeks following the exchange of contracts or 20 December 2019. The Heads of Agreement provided for an exclusive due diligence period of 35 days from the date of the agreement. Due diligence was stated to include “Aluminium Composite Panels review (if required)”.

5. [6]

   On the day after the Heads of Agreement was executed (25 October 2019), Mr Brandon Carter, an employee of KKR Australia Pty Ltd, met with Mr Darren Beatty of Westpac concerning the possibility of borrowing the required funds to purchase the Apartments as well as refinancing the loan in respect of the Caydon Acquisition. KKR took primary responsibility for negotiating the terms of the loan with Westpac and Altis took primary responsibility for negotiating the terms of the acquisition with Holdmark.

6. [7]

   As part of the due diligence, on 29 October 2019, Altis retained KMPG SGA to conduct a technical due diligence, which included an examination of the cladding on the exterior façades of the relevant buildings to determine whether they complied with fire safety requirements. Following investigations, on 20 November 2019, KPMG SGA recommended that Altis engage a façade specialist to undertake a detailed inspection to establish the exact type of aluminium composite panelling (ACP) installed on the façades of the buildings. It recommended that if it was found that the ACP was non-compliant with the Building Code of Australia then Holdmark should:

7. [8]

   Although Holdmark was pressing for an exchange of contracts, Altis’s position was that it was not willing to proceed until the issues in relation to the cladding had been resolved. The parties eventually agreed in principle through an exchange of emails on 19 and 20 December 2019 that:

8. [9]

   In the meantime, KKR commenced negotiations with Westpac on the terms of the proposed facility. Those negotiations were conducted principally by Mr Carter and Mr Peter White, who at the time was a director in the real estate team of KKR Australia Pty Ltd and who was Mr Carter’s immediate superior.

9. [10]

   On 28 October 2019, Mr Carter sent an email to Mr Beatty confirming that KKR was very keen for Westpac to provide indicative terms to refinance the Bank of Melbourne loan and to finance the acquisition of the Apartments. For that purpose, Mr Carter provided Mr Beatty with financial models for the Caydon Acquisition at the time of drawdown and the acquisition of the Apartments and a document that compared the financial terms applicable to the Bank of Melbourne loan with the terms that KKR was seeking for the new loan.

10. [11]

    On 6 November 2019, the relevant KKR investment committee granted preliminary approval to the investment in Majors Bay Development on the basis that it was expected that the cost of debt would be 3.2 percent compared to 3.6 percent in relation to the loan from Bank of Melbourne.

11. [12]

    After substantial negotiations particularly in relation to the financial terms of the loan, on 17 January 2020, Westpac provided KKR with an indicative term sheet (which was stated to be “subject to formal credit, other internal approvals and satisfactory documentation …”). By that stage, KKR was also considering investing with Altis in 186 units located in the Sky Tower development in Brisbane. The proposed facility was originally designed to provide a loan for that acquisition as well. By that stage also, Mr Denis Dundovic had become the primary point of contact at Westpac.

12. [13]

    The term sheet was the subject of further negotiations between Westpac and KKR. The final version was sent to KKR on 29 January 2020 and accepted by Altis on that day. At that stage Altis 2 had not been incorporated. The parties were named as Altis Propco 1 Pty Ltd (another subsidiary of Altis that had been incorporated) and Altis 2. The facility was divided into three tranches. Tranche A was to refinance the loan from Bank of Melbourne. Tranche B was to acquire the Apartments and Tranche C was to acquire the units in the Sky Tower Development. The proposed facility was for three years. The proposed interest rate and fees were:

13. [14]

    Clause 4 provided that “each Tranche will be available in a single drawing on or before Financial Close”. Clause 4 also relevantly provided:

14. [15]

    The terms “LVR” and “ICR” were defined in clause 7. That clause relevantly provided:

15. [16]

    Clause 11.1 provided:

16. [17]

    Investigations and negotiations in relation to the cladding issue continued past 7 February 2020.

17. [18]

    On 10 February 2020, Mr Cunningham, Mr Shaun Hannah, one of the co-founders of Altis, and Mr Gareth Price, Holdmark’s director of capital transactions and the person to whom Mr Cunningham reported, met with Mr Dundovic to discuss the cladding issue. During that meeting, Mr Dundovic told Mr Hannah that, although Westpac did not normally lend for the acquisition of properties that had non-compliant cladding, it was willing to do so if the parties agreed on an arrangement to fix the problem within a suitable time and Westpac was satisfied with that arrangement.

18. [19]

    According to Mr Cunningham, on 18 February 2020, he and Mr Hannah had a telephone conversation with Ms Sue Tan, Holdmark’s General Counsel. During that conversation, Ms Tan complained that the process was taking too long and that if contracts were not exchanged soon the deal would be off. Mr Cunningham told her that Altis could not exchange contracts until it had secured funding from Westpac.

19. [20]

    On 20 February 2020, there was a meeting at Holdmark’s offices attended by Mr Sarkis Nassif, the founder of Holdmark, Mr Kevin Nassif, the chief operating officer of Holdmark, Ms Tan, Mr Hannah and Mr Cunningham. The meeting lasted for approximately one and a half to two hours. The main topic of discussion was the cladding issue. Following that meeting, Mr Kevin Nassif sent Mr Hannah and Mr Cunningham a proposed clause to be incorporated in the sale contract which reflected the discussions at the meeting. On the same day, Mr Cunningham sent an email to Mr White summarising what had been agreed.

20. [21]

    There were further negotiations in relation to those terms. On 24 February 2020, Ms Tan sent an email to Mr Hannah stating, among other things, that “[i]f contracts are not exchanged by 11 am tomorrow, then the whole deal is off”. That email provoked some internal discussion within KKR on whether it should agree to an exchange on 25 February 2020. Mr Paul Yang, of KKR, in an email addressed to Mr Carter among others expressed some doubt about the need to exchange immediately having regard to what appeared to be the execution risks. Mr White responded by saying, among other things, that the execution risk was ameliorated by the fact that there were two avenues to rescind the contract, which he described in these terms:

21. [22]

    Mr John Pattar, who is head of KKR’s real estate business in Asia Pacific, also replied to Mr Yang’s email by saying:

22. [23]

    On 25 February 2020, Mr White sent the following email to Mr Cunningham:

23. [24]

    Contracts were, in fact, exchanged on 27 February 2020. The final contract was for the acquisition of 56 apartments for a total price of $41,980,000. On exchange, Altis 2 paid a deposit of $2,099,000.

24. [25]

    Clause 35.1 of the Contract provides:

25. [26]

    Clause 36 of the Contract provides:

26. [27]

    Clause 49 of the Contract deals with the cladding works. Clause 49.1 requires MBD at its cost to engage a fire engineer to carry out a detailed examination and analysis of the external façade of the buildings and to provide a report setting out recommendations in relation to the replacement of the cladding or alternative fire safety measures to comply with the Building Code of Australia. Under cl 49.2, MBD was required to carry out the necessary works as soon as reasonably practicable after obtaining the Fire Engineering Report (FER). Under cl 49.3, if the necessary work was not or could not be completed within five weeks of the date of the contract then, before settlement, MBD was required to pay into an escrow account 1.5 times the amount determined by a quantity surveyor as the amount necessary to undertake the work identified by the fire engineer. The escrow amount was to be released on completion of the work. If the work was not completed within the time specified in the contract, Altis 2 was entitled to payment of the amount held in escrow.

27. [28]

    Under cl 3.9, MBD was required to return the deposit if the Contract was rescinded.

28. [29]

    On 11 March 2020, the World Health Organisation declared COVID-19 to be a global pandemic.

29. [30]

    On 17 March 2020, Mr Dundovic sent Mr White a conditionally approved term sheet. That term sheet contained a number of amendments to the indicative term sheet dated 29 January 2020. By that stage, KKR and Altis had abandoned the proposal to buy units in the Sky Tower development. Consequently, the facility no longer included financing for that acquisition.

30. [31]

    The term sheet was expressed to be “subject to satisfactory documentation …”. It also contained the following term:

31. [32]

    The term sheet also stated that the “pricing is subject to Westpac pricing committee approval”. It also contained changes to the mandatory prepayment obligation. As amended, that obligation was in the following terms:

32. [33]

    Clause 8 (previously cl 9) relevantly stated:

33. [34]

    Altis 2 did not sign the term sheet.

34. [35]

    On 23 March 2020, Westpac’s pricing committee approved the pricing set out in the conditionally approved term sheet, but with an increase of 45 basis points to the margin. It appears that KKR was not notified of that decision immediately. Instead, on 26 March 2020, Mr Cunningham asked Mr White whether he had received any correspondence form Westpac. Mr White replied that he had not and that he would chase Westpac up. Mr White spoke to Mr Dundovic the following day (27 March 2020), which was a Friday. Mr Dundovic informed Mr White that he had received pricing approval, but that it had been increased by 45 basis points. According to Mr White, Mr Dundovic said that the reason for the increase was that “[t]here is more risk now”. Shortly after that call, Mr Dundovic called Mr Cunningham and told him of Westpac’s decision.

35. [36]

    Also on 27 March 2020 at 12.46 pm, Mr Cunningham sent representatives of Holdmark an email requesting an update in relation to the indicative pricing from the quantity surveyor on the remediation work. Mr George Khoury of Holdmark provided that pricing in an email sent at 5.18 pm that day, which had the effect of fixing the date for completion in cl 35.1(b) of the Contract.

36. [37]

    Also on 27 March 2020, at 5.05 pm, Mr White sent Mr Dundovic an email saying:

37. [38]

    In the meantime, on 25 March 2020 the overseas travel ban implemented by the Biosecurity (Human Biosecurity Emergency) (Human Coronavirus with Pandemic Potential) (Overseas Travel Ban Emergency Requirements) Determination 2020 (Cth) came into effect.

38. [39]

    At 11.14 am on 30 March 2020, Mr Dundovic sent Mr White (with a copy to Mr Cunningham and others) an email in response to Mr White’s email sent at 5.05 pm on 27 March 2020, which relevantly said:

39. [40]

    About one and a half hours later Mr Dundovic sent Mr White (again with a copy to Mr Cunningham among others) the following email:

40. [41]

    On the following day, the first lockdown in New South Wales implemented by the Public Health (Covid-19 Restrictions on Gathering and Movement) Order 2020 (NSW) (the Public Health Order) came into effect.

41. [42]

    On 31 March 2020, Mr Cunningham sent Mr Dundovic an updated model which was based on the model that had been provided to Westpac on 7 January 2020. The email was a response to Mr Dundovic’s email sent at 11.14 am on 30 March 2020. It said:

42. [43]

    In the light of that email and model, Westpac decided to withdraw its offer. Mr Dundovic explained the decision in an internal email dated 1 April 2020 in these terms:

43. [44]

    Mr Beatty had made comments on an earlier draft of that email. One change he made was to the last bullet point, which had previously read “Sponsors concerns regarding the performance of the facility” — a change to which, as I will explain, MBD attaches some significance.

44. [45]

    On 2 April 2020, Mr Dundovic sent Mr Cunningham an email attaching a letter from Westpac advising that Westpac had revoked its offer set out in the term sheet. The letter stated:

45. [46]

    MBD contends that the second paragraph of this letter makes no sense because the costings that were to form the basis of the further credit approval were not yet due (although they had, in fact, been received on 27 March 2020). I do not accept that submission. Mr Dundovic was not suggesting that Altis 2 had breached some obligation owed to Westpac by not providing the costings. He was simply saying that the loan was conditional on an event which had not yet occurred.

46. [47]

    When cross-examined on that letter, Mr Cunningham gave evidence that he believed that Mr White had asked for a formal response to the loan application. He gave this evidence:

47. [48]

    On 3 April 2020 Altis’s solicitors, Clayton Utz, sent to Ms Tan an email which relevantly stated:

48. [49]

    On 7 April 2020, Mr Cunningham sent Mr Dundovic an email saying:

49. [50]

    Mr Dundovic replied the following day saying:

50. [51]

    On 15 April 2020, Mr Cunningham sent Mr White an email saying that Altis wished to “determine whether we should explore with Westpac whether it would be prepared to offer financing arrangements on alternative terms”. For that purpose, Mr Cunningham asked Mr White a number of questions about KKR’s attitude including whether:

51. [52]

    Mr White replied the following day. He stated that modification of the business plan to incorporate projections resulting from the expected impact of COVID-19 would have detrimental impacts on the risks and returns relating to KKR’s loan note facility. He also stated that there was a material risk that a delay in leasing and sale of the apartments would trigger defaults under the loan facility. He said that KKR was not prepared to agree to an increase in the margin. He also said that capitalisation of interest would increase KKR’s exposure, that the reduced ICR covenant was unlikely to be achievable and that the provision of additional capital would require a higher rate of return. He said that KKR was open to a subordination agreement. He also said that KKR was prepared to entertain other lenders, but that Westpac “were by far the most competitive of the lenders you approached during the Business Plan drafting …”. Prior to sending the email, Mr White told Mr Cunningham that KKR would not move from the business plan on which investment committee approval was based.

52. [53]

    On 16 and 17 April 2020, in exercise of Altis 2’s rights under cl 36.2(c) of the Contract, Ms Tan sent emails extending the Finance End Date to 11 June 2020.

53. [54]

    Between 20 April 2020 and 26 May 2020, Altis approached Westpac on several occasions to see whether it would reconsider its position.

54. [55]

    Mr Cunningham says in his affidavit evidence that he spoke to Mr Dundovic on 20 April 2020 and asked whether pricing had improved. According to Mr Cunningham, Mr Dundovic replied “Pricing is still high and our appetite for the transaction remains low. I will keep you updated if pricing improves but the short term outlook for this transaction and similar transactions remains negative”.

55. [56]

    Following that conversation, on 22 April 2020, Clayton Utz sent Ms Tan a letter by email which relevantly said:

56. [57]

    On 27 April 2020, Mr Cunningham sent Mr Dundovic an email in the following terms:

57. [58]

    Mr Dundovic replied the same day saying “I can confirm that Westpac’s position has not changed”.

58. [59]

    Mr Cunningham spoke to Mr Dundovic again on 4 May 2020 asking about the prospects of a new deal. According to Mr Cunningham, Mr Dundovic’s response was generally negative. He referred to the fact that Westpac had released its results that morning, which were significantly worse than expected. He said that in order to re-enliven the application, Westpac would need an updated valuation which was conservative in relation to real estate values and rents and that it would take a minimum four weeks for Westpac to consider an application from receipt of the updated valuation. Mr Cunningham says that he had a further telephone call with Mr Dundovic on 13 May 2020 in which Mr Dundovic said that nothing had changed from the bank’s perspective and it would not approve a loan on the original terms. Mr Cunningham says that he had a further telephone conversation with Mr Dundovic to much the same effect on 19 May 2020. According to Mr Cunningham, during one of the conversations Mr Dundovic told him that he (Mr Dundovic) had had far superior loans rejected by credit, that he had had only one or two loans approved and that the bank was effectively closed for new business.

59. [60]

    On 26 May 2020, Mr Cunningham and Mr Hannah called Mr Dundovic. According to Mr Hannah, Mr Dundovic said in effect that the loan could not be progressed unless the loan amount was reduced or the interest rate was materially higher. Mr Hannah says that Mr Dundovic said words to the following effect:

60. [61]

    On 2 June 2020, Clayton Utz sent a letter by email to the solicitors acting for MBD in which they relevantly said:

61. [62]

    The Finance End Date occurred on 11 June 2020. Altis served a notice of rescission the following day.

Clause 36 of the Contract

1. [63]

   Clause 36 of the Contract relevantly raises two issues of construction. The first is whether the reference to “loan” in cl 36.1 is a reference to the terms of the loan set out in the indicative offer dated 29 January 2020 or whether it refers more generally to the terms of any loan that might be obtained from Westpac. The answer to that question is important because it gives content to the best endeavours obligation in cl 36.2(a)(i). The second is whether the right to rescind given by cl 36.2(b) is dependent on compliance with the obligations set out in cl 36.2(a). The answer to that question is relevant to the question whether Altis 2 was entitled to exercise a right of recission.

2. [64]

   In my opinion, the reference to “loan” must be read as a reference to a loan to acquire the Apartments that was substantially on the terms of the loan for which Altis had applied. Altis 2 was relevantly under an obligation to use its best endeavours to have “the loan” approved. The parties did not clearly distinguish between Altis and Altis 2 and the reference to “the loan” was clearly a reference back to the loan in respect of which Altis 2 gave the warranty in cl 36.1. That warranty was not given in respect of a loan generally. Rather, it was given in respect of a loan for which “the purchaser” had applied to Westpac. Only one loan met that description — that is, the loan described in the indicative term sheet dated 29 January 2020. It is true that that loan had three tranches including a tranche to refinance the loan from Bank of Melbourne and a tranche to acquire apartments in the Sky Tower development in Brisbane. However, the term sheet clearly distinguished between those three tranches and Altis 2 had a right to drawdown on each of them separately. Tranches A and C were irrelevant to the acquisition of the Apartments. Consequently, it is natural to read the reference to the loan for which Altis 2 had applied as a reference to Tranche B.

3. [65]

   MBD contends that the construction set out in the previous paragraph makes no commercial sense, although its explanation of why that is so is difficult to understand. The parties understood that Altis was acquiring the Apartments as an investment for a client. It was apparent to both parties that whether the investment was attractive or not depended on the commercial terms on which it could be made, including the terms on which part of the purchase price could be borrowed. Holdmark knew that Altis was seeking to obtain a loan from Westpac in connection with the transaction. It must have understood that the terms of that loan were important to Altis’s decision whether to proceed with the transaction to acquire the Apartments. Mr Cunningham’s evidence is that he told Ms Tan in a telephone conversation on 18 February 2020 that Altis could not exchange contracts until it had obtaining funding from the bank. I accept that evidence. It was not denied by Ms Tan (who did not give evidence) and the evidence is plausible. It is consistent with the fact that a short time later the parties commenced negotiations on the terms of what became cl 36 of the Contract. Altis wanted to wait until it had obtained finance before entering into the Contract. Holdmark was insisting that it enter the Contract immediately. In those circumstances, it was natural for the parties to agree to enter into an agreement that was conditional on Altis obtaining the financing it was seeking.

4. [66]

   Whether a contractual right is dependent on a contractual obligation is a matter of construction. As Megarry V-C explained in Tito v Waddell (No 2) [1977] Ch 106; 3 All ER 129, 297:

5. [67]

   In the present case, I am not satisfied that the obligation to use best endeavours and the right of recission are dependent. They are not expressed to be dependent. The right of recission depends on a decision of Westpac over which Altis had limited control. Altis’s best endeavours were neither a necessary nor sufficient condition for the loan to be approved and consequently their absence was neither a necessary nor sufficient condition for the triggering of a right of recission.

6. [68]

   MBD points to the fact that the requirement to use best endeavours and the right of recission are contained in the same clause. However, in my opinion, little turns on that. The right and the obligation are concerned with the same subject matter — that is, the loan from Westpac. It was natural that they be contained in the same clause. Moreover, cl 36.2 contains two obligations. One is to use best endeavours. The other is to keep the vendor fully informed of the progress of the loan application. The parties could not have intended that the right of recission was dependent on compliance with that second obligation. Compliance with that obligation had no effect at all on whether the right of recission would arise. The parties could not have intended compliance with one obligation to affect the right of recission, but compliance with the other not to have that effect when the two obligations are contained in precisely the same clause.

7. [69]

   The failure to use best endeavours may or may not have had an effect on Westpac’s decision to refuse the loan (if that is what its decision was). If it had no effect, it is difficult to understand why commercially the parties would have agreed to a provision that still prevented Altis 2 from exercising a right of recission. On the other hand, if did have that effect, MBD would not be left without a remedy. It could still sue for damages for breach of contract. Moreover, in my opinion, it would still be entitled to rely on the principle of construction that “in the absence of clear words, a contractual entitlement upon a particular event will not be enlivened if the event came about through breach of the party seeking to rely on it”: see Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443; (2005) 12 BPR 23,923 at [20] per Giles JA (with whom Santow JA and Hunt AJA agreed). See also Sydney Attractions Group Pty Ltd v Frederick Schulman [2013] NSWSC 858 at [41] per Sackar J; Alghussein Establishment v Eton College [1991] 1 All ER 267 at 270. In that context, it makes little commercial sense to interpret the right as conditional on absolute compliance with the obligation.

8. [70]

   As Altis 2 pointed out in its submissions, where the parties intended to make a right of recission conditional on compliance with a contractual obligation, they specifically said so. In particular, cl 28 of the Contract relevantly provides:

9. [71]

   Altis 2 submits that the terms of cl 36 of the Contract are sufficiently clear to displace the principle of construction that a party cannot take advantage of its own wrong as well. It submits that that is so because the Contract expressly preserves the right to claim damages and because the application of that principle would introduce a degree of uncertainty in the operation of the Contract that the parties could not have intended. I do not accept that submission. The purpose of the best endeavours obligation was to give MBD some comfort that Altis 2 would take all reasonable steps to secure the loan. It was a promise given in return for MBD’s agreement that the Contract could be rescinded (and the deposit returned) if the loan was not obtained within the time specified in the Contract. It seems improbable that the parties would have intended that the deposit was to be returned even if Altis 2 failed to use best endeavours to obtain the loan and that failure was a cause of the loan not being obtained unless they specifically said so. However, there is nothing in the Contract which specifically states that the right of recission was preserved even if Altis 2 failed to use best endeavours.

Did Altis 2 use best endeavours?

1. [72]

   An obligation to use best endeavours is to be understood as an obligation to do all that reasonably can be done in the circumstances to achieve the contractual obligation, but no more: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 64 per Gibbs CJ, citing Sheffield District Railway Co v Great Central Railway Co (1911) 27 TLR 451 at 452; Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234 at 237. What constitutes ‘best endeavours’ must be “measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the [party who bears the obligation] viewed in the light of the particular contract”: Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83, 101 per Mason J.

2. [73]

   The difference between “best endeavours” and “reasonable endeavours” is somewhat elusive, although it has been suggested that the former imposes a “somewhat higher” standard than the latter: Foster v Hall [2012] NSWCA 122 at [33] per Macfarlan JA (Meagher JA and Tobias AJA agreeing). The difference seems to be that the former imposes an obligation to do everything that is reasonably possible to bring about the stated end, whereas the latter simply requires a person on whom the obligation is placed to take steps that a reasonable person in the circumstances would take to achieve that end.

3. [74]

   Consequently, the question in this case is whether Altis 2 did all that it reasonably could to obtain Westpac’s approval to a loan substantially on the terms set out in the indicative term sheet dated 29 January 2020.

4. [75]

   On that question MBD seeks primarily to demonstrate in detailed submissions based on what is described as circumstantial evidence that Mr Cunningham and Mr White in effect conspired, with the knowing or unknowing assistance of Mr Dundovic, to bring about a situation in which Westpac withdrew its offer to provide financing in order to permit KKR to get out of the transaction. As part of those submissions, it invites the Court to make adverse credit findings against both Mr Cunningham and Mr White. Tell-tale signs of the conspiracy are said to include (without in any way intending to be exhaustive) (1) the internal KKR correspondence indicating that KKR thought that the Contract had been designed with sufficient conditionality to enable it to walk away if it wanted; (2) the fact that “the business”, rather than credit, decided to withdraw the offer of financing and the fact that the reasons given (such as the suggestion that there was an existing ICR default) made no sense, indicating that Westpac was keen to accommodate the desires of its customer; (3) the fact that Mr Cunningham produced a revised model for Westpac that contained unduly pessimistic assumptions, including the assumptions in relation to interest rate and sale prices; (4) the fact that Westpac issued two emails in relation to the increase in rates, the later of which did not include in the email chain Mr White’s email to Mr Dundovic referring to “tweaks to the credit approval”; (5) the fact that Mr Beatty changed the email giving notice of Westpac’s decision so that it offered as one of the reasons for the decision “Sponsors concerns regarding the performance of the investment” rather than Sponsors’ concern regarding the performance of the facility; and (6) the fact that no serious attempt was made to renegotiate the terms of the loan with Westpac and that instead Mr Cunningham made periodic and half-hearted requests of Mr Dundovic about whether Westpac had changed its mind. These points are said to be supported by the fact that the possible effect of COVID-19 did not feature heavily in Westpac’s decision to withdraw the loan.

5. [76]

   Mr Cunningham was said not to be a credible witness for a large number of reasons including (1) the fact that he did not depose in his affidavit evidence and said in cross-examination that he could not recall the contents of what was said to be a critical conversation with Mr White on 30 March 2020, after Mr White had received Mr Dundovic’s emails (and before Mr Cunningham replied to Mr Dundovic on 31 March 2020); (2) his failure to depose to a conversation on the afternoon of 30 March 2020 with Mr Price and Mr Hannah, which is evidenced by emails arranging the call; and (3) his inability to explain why he included critical assumptions in the model sent to Westpac on 31 March 2020.

6. [77]

   Mr White was said not to be a credible witness also for a large number of reasons. They included (1) his refusal to accept that KKR led the negotiations with Westpac, despite clear evidence to the contrary; (2) his insistence that he explained to Mr Dundovic that KKR could not agree to an increase in the margin of 45 basis points, when he described it as a “tweak” to the credit approval and what were said to be evasive answers to questions on that subject; (3) his resistance to the proposition that it was likely that KKR would use a loan note structure, despite that being contrary to the objective evidence; (4) his denial that BBSY was falling fast, despite clear objective evidence to the contrary; (5) his denial that he was mindful of the fact that the purchase contract contained a best endeavours obligation.

7. [78]

   MBD also suggested that an adverse inference should be drawn against Altis 2 in accordance with the principles stated in Jones v Dunkel (1959) 101 CLR 298 from the fact that it did not call Mr Dundovic, Mr Price or Mr Carter.

8. [79]

   I do not accept these submissions. I do not accept that it was necessary for Altis 2 to call any of Mr Dundovic, Mr Price or Mr Carter. Mr Dundovic was not in Altis 2’s camp. He was independent of either party and could have been called by either of them. Altis 2 called the witnesses from Altis and KKR who were most closely involved in the events giving rise to these proceedings — that is, Mr Cunningham and Mr White. The principle stated in Jones v Dunkel does not require it to call all witnesses who had some involvement in those events.

9. [80]

   I accept that there were some difficulties in the evidence given by Mr Cunningham and Mr White. However, in my opinion both sought to answer questions truthfully as best as their recollections permitted. Both prepared their affidavit evidence at the time they were employees of Altis and KKR respectively. However, both have since left employment with those companies. Although no doubt both had an interest in defending their conduct, neither had a clear interest in defending Altis’s case. The relevant events occurred two or more years ago, and much has changed over that time. Moreover, many of the critical events occurred at a particularly uncertain time as a result of the pandemic. It is, therefore, not surprising that their recollections on some matters were poor. A number of the criticisms made of Mr White, in particular, do not seem important. His evidence concerning whether KKR intended to use a loan note structure and his evidence in relation to the best endeavours obligation are examples. His evidence in relation to both was, in fact, plausible. The effect of his evidence on the former was that KKR had not initially committed to a loan note structure and wanted to obtain taxation and legal advice before it did. The effect of his evidence in relation to the latter was that he did not have a clear understanding that Altis 2 had a best endeavours obligation and that he did not know whether it had an obligation of that type or an obligation to use reasonable endeavours. Given the content of a best endeavours obligation, that is plausible.

10. [81]

    Likewise, the conspiracy case must be rejected. The allegation that Mr Cunningham and Mr White deliberately sought to engineer a situation where Westpac would refuse to lend is a serious allegation. There is a question whether that case had to be pleaded. However, it is unnecessary to resolve that issue. On the conclusions I have reached concerning the correct construction of cl 36 of the Contract, MBD bears the onus of proof on that issue, since it bears the onus of proving that Altis 2 breached the Contract and the right of recission it claimed to be entitled to exercise arose from that breach. In considering whether it has discharged that onus, it is necessary to bear in mind the seriousness of the allegation: see Evidence Act 1995 (NSW) s 140(2)(c); Briginshaw v Briginshaw (1938) 60 CLR 336 at 361–2 per Dixon J. As I will explain, MBD has not discharged that onus. Indeed, in my opinion, the conspiracy case must be rejected.

11. [82]

    MBD advances an alternative case that Altis 2 did not use its best endeavours to procure Westpac’s agreement to the loan. The reasons why I reject MBD’s conspiracy case are best explained by explaining why I reject that alternative case as well.

12. [83]

    The obligation to use best endeavours, obviously enough, did not arise until the Contract was signed and exchanged. It is an obligation imposed on Altis 2. No doubt Altis 2 acted through Altis, and for that reason the obligation was effectively an obligation of Altis. Similarly, to the extent that KKR acted as Altis 2’s agent in negotiating with Westpac any act or failure to act on the part of KKR could involve a breach by Altis 2 of its best endeavours obligation. However, KKR itself was not the subject of a best endeavours obligation. It remained free to withdraw from the proposed acquisition at any time, although withdrawal by it did not trigger a right of recission. As I have explained, the best endeavours obligation was an obligation to use best endeavours to obtain a loan to acquire the Apartments on substantially the same terms as those set out in the indicative term sheet dated 29 January 2020.

13. [84]

    Little turns on the conduct of KKR or, for that matter, Altis before the Contract was signed and exchanged. It was natural for KKR and Altis to seek to bargain for as much flexibility in the conditions of the Contract when financing had not been approved and the problems with the façade had not been rectified. The fact that KKR took comfort from whatever conditions were included in the Contract in deciding to give its approval to it, as evidenced by the exchange of emails on 25 March 2020, says nothing about Altis 2’s willingness to comply with its best endeavours obligations.

14. [85]

    There is a suggestion that Altis 2 did not use best endeavours because it did not sign the conditionally approved term sheet that Mr Dundovic sent Mr White on 17 March 2020. However, in my opinion, the best endeavours obligation did not require Altis 2 to sign that term sheet, at least until Westpac communicated the decision of the pricing committee. Until then, Altis 2 did not know what terms it was being asked to accept.

15. [86]

    Altis 2 was informed orally on 27 March 2020 and in writing on 30 March 2020 (the next business day) of the pricing committee’s decision. That decision was to increase the margin by 45 basis points on the price included in the indicative term sheet. There is a question whether that increase was material. Taken in isolation, an increase of 45 basis points might be regarded as material. However, the base rate (BBSY) had dropped significantly. The evidence is that the BBSY rate on 3-month bank bills was approximately 0.9309 percent on 29 January 2020. By 27 March 2020, it had dropped to approximately 0.4778 percent. Consequently, the total interest rate had decreased slightly between the two dates. Mr White described the changes to the credit approval as “tweaks”, which suggests that he thought that they were minor. It is not necessary, however, to reach a final decision on this question, since the significance of the rate increase was overtaken by events.

16. [87]

    At the time that Mr Dundovic told Mr White of the decision of the pricing committee he expressed concern about “the volatility in the market value of security apartments as well as the lease up, occupancy and rents that can be achieved in the current environment” and asked Mr White to provide details “of how you are comfortable with the ascribed market values and rents that can be achieved”. There is no reason to believe that those statements did not reflect genuine concerns held by Westpac at the time. MBD points to the fact that approximately an hour and a half later Mr Dundovic issued a more formal notification of Westpac’s decision, which did not include any expression of concern and did not include the earlier emails, including Mr White’s email describing the changes as “tweaks”. As I have said, MBD suggests that there was something sinister in that. I do not agree. I accept that it is likely that the second email was sent at Mr White’s request. The most plausible explanation for the request is that Mr White wanted a formal record of Westpac’s decision that he could provide to KKR’s investment committee and Mr Cunningham could provide to his superiors and to MBD which simply recorded Westpac’s position. There is no reason to think that it was designed to create some separate evidence trail in anticipation of litigation. There is no evidence that at that time Mr White and Mr Cunningham had decided between themselves that they did not want to proceed with the acquisition of the Apartments. It was not their decision to make. The most that could be said was that the rapidly evolving situation in relation to COVID-19 was causing them and Westpac concerns. That seems entirely plausible. Mr Cunningham accepts that he was conscious of the best endeavours obligation, and that he wanted to create a documentary trail that evidenced Altis 2’s compliance with that obligation. There is nothing surprising or untoward in that. Nothing that Mr White or Mr Cunningham had done or not done to that point involved a failure on the part of Altis 2 to use best endeavours to procure the loan.

17. [88]

    On 31 March 2020, Mr Cunningham responded to Mr Dundovic’s request for details on “how you are comfortable with the ascribed market values and rents that can be achieved”. It is reasonable to infer that that response was one of the matters that led to the decision of Westpac to withdraw its offer. The response had three elements. First, it included an updated model. Second, it expressed a number of concerns about proceeding with the acquisition of the Apartments. Third, it set out what Altis 2 wanted — which was a return to the original pricing and additional relief in respect of the ICR covenant. In my opinion, an important, if not critical, question in the case is whether that response involved a breach of the obligation to use best endeavours.

18. [89]

    I have concluded that it did not. Mr Cunningham had to respond to Mr Dundovic’s request. It would have been a breach of the best endeavours obligation not to do so. Although Westpac had issued the conditionally approved term sheet and the pricing committee had made a decision on the pricing of the loan, the loan was still subject to negotiation of the terms of the formal facility agreement. The likelihood is that Westpac would not have engaged in those negotiations if it had not received any response to Mr Dundovic’s request. Moreover, any response had to convey Mr Cunningham’s, and Altis’s, honestly held views. If it did not, they ran the risk of misleading Westpac. Moreover, Westpac is a highly sophisticated lender. Mr Dundovic asked the questions he did because Westpac had understandable concerns about those matters. Mr Dundovic’s email gave Altis an opportunity to respond to those concerns. A response that simply denied those concerns was likely to increase rather than allay them. The approach that Mr Cunningham appears to have taken was to accept the concerns expressed by Westpac and to propose a solution to them, which involved concessions by Westpac.

19. [90]

    In my opinion, that was a reasonable approach to take. The lockdown took effect the same day. It was uncertain how long it would last, but the expectation was that it could last a number of months. It was uncertain what effect the lockdown, and the pandemic generally, would have on house prices and rents. However, it was reasonable to think that it would have an adverse effect because of the limitations on movements.

20. [91]

    It is difficult to see that anything turns on the fact that the decision taken by Westpac was taken by the business rather than credit. It is true that the role of the business is to deal with customers and potential customers and to solicit business. But there is no evidence to suggest that it was not usual or appropriate for the business on occasions to make a decision that it was no longer willing to support a particular loan application because of a change in circumstances. That appears to be what happened in this case.

21. [92]

    MBD submits that the internal records of Westpac do not support a conclusion that the bank was concerned about the pandemic. However, there are no internal records of Westpac which explain why it took the decision to withdraw the loan. The only evidence before the Court is the communication of that decision to credit. Nonetheless, it is plain from Westpac’s communications with KKR and Altis that it was concerned about the pandemic and the effect that the pandemic would have on the assumptions on which the original loan approval was based. It would be extraordinary if Westpac did not have those concerns.

22. [93]

    MBD points out that the Public Health Order did not prevent a person from moving residences and permitted the inspection of properties for the purposes of sale or lease. However, open inspections were prohibited. The only exception was that “a person may show a single person the premises after the person has made an appointment for that purpose”: see cl 7(3)(a). It was still reasonable to think that that restriction in combination with the general effect of the Public Health Order would have a very substantial effect on the market; and that the restriction on overseas travel would also have some effect on the number of potential purchasers, since it was likely to have an effect on buyers who lived overseas.

23. [94]

    MBD is critical of some of the assumptions made in the model included with Mr Cunningham’s email. In particular, it points to the fact that the model was predicting a five percent decrease in prices in the first year. MBD submits that that change was at best overly pessimistic and at worst a deliberate adjustment to make the transaction look unattractive, particularly since a corresponding change was not made to the model for the Caydon Acquisition — an anomaly that Mr Cunningham could not explain. Similarly, the model assumed a base interest rate of 0.7 percent, which was substantially higher than the BBSY rate at the time. The model also assumed a reduction in the number of units that would be leased each month.

24. [95]

    In my opinion, the assumptions adopted by Mr Cunningham were reasonable. Mr Cunningham gave the following evidence in relation to the market growth rate:

25. [96]

    As Mr Cunningham also pointed out in cross-examination, the model did not include an interest rate curve. It assumed that the average base rate over the period of the loan would be 0.7 percent. Particularly in view of the uncertainty, that assumption obviously involved a degree of guess work. It does not appear to be unreasonable. For the reasons I have already given, I accept that it was appropriate to adjust the model to reduce the rate at which the Apartments would be leased. As Mr Cunningham pointed out, the position was different in relation to the units that had been acquired in Melbourne, since most of those had already been leased.

26. [97]

    MBD is critical of Altis 2’s conduct because it did not notify Westpac of the fact that it (Altis 2) had been notified on 27 March 2020 of indicative pricing from the quantity surveyor on the remediation work. However, as Altis 2 points out, that costing was sent to Mr Cunningham because he had chased it earlier that day. He did not receive it until after 5.00 pm on 27 March. The next business day was 30 March. There were more urgent matters for Mr Cunningham to attend to that day. Although the pricing would eventually have to be approved by the credit committee, it was not something which required immediate attention.

27. [98]

    MBD led expert evidence from Mr John McGuinness, an accountant. He gave evidence that, even on the assumptions contained in the 31 March 2020 model, the investment was still profitable. But little turns on this evidence. The critical question is whether Altis breached its obligation to use best endeavours by giving Westpac the information it did in Mr Cunningham’s email dated 31 March 2020. As I have explained, in my opinion, Altis 2 had to respond to Westpac’s request and it had to give a response which was plausible. Anything less than that may well have breached the best endeavours obligation. In my opinion, Mr Cunningham’s response satisfied that requirement.

28. [99]

    One other point should be made in this context, which is particularly relevant to MBD’s conspiracy case, and that is that it is difficult to understand the genesis of the conspiracy if there was one. There is no evidence that senior people at Altis or KKR had instructed Mr Cunningham and Mr White respectively that they wanted to get out of the transaction, leaving it to Mr Cunningham and Mr White to achieve that objective. Despite some misgivings by some people at KKR in January 2020, KKR decided to proceed with the transaction. Admittedly, they may have done so believing that they could get out of it if it proved to be unattractive. However, there is no evidence that that is the conclusion that they had reached by 31 March 2020, let alone that they gave some instructions to Mr White in that regard.

29. [100]

    Similarly, Mr Hannah appears to have put in considerable personal effort in seeking to resolve the issue in relation to the cladding. MBD accepts that Mr Hannah gave straightforward evidence on which the Court could place some reliance. But his evidence is to the effect that Altis remained keen to pursue the deal even after 31 March 2020. Consequently, MBD’s conspiracy case must be that Mr Cunningham and Mr White took it upon themselves to extract Altis 2 from its obligations under the Contract. However, why they did so remains unexplained.

30. [101]

    It was natural for Mr Cunningham to wait to receive Westpac’s response to his email sent on 31 March 2020 before doing anything else. That response, which was sent two days later, on 2 April 2020, withdrew the offer. Holdmark was notified of that decision the following day. Mr Hannah says, and I accept, that he instructed Mr Cunningham to continue to engage with Westpac in an attempt to understand the basis of the decision and see if it could be reversed. I accept that evidence. Having regard to the position Mr Hannah had taken up until then, it was a natural position for him to take.

31. [102]

    The details of subsequent events are set out above. I accept that there is an element in what Altis did of it going through the motions to preserve its right of recission. But the question is what else it could have done. As I have explained, the best endeavours obligation did not require Altis to seek quite different (and less favourable) terms from Westpac. It was limited to an obligation to obtain a loan on substantially the same terms as the indicative term sheet. It seems plain that Westpac was not prepared to offer those terms at any time before the Finance End Date.

32. [103]

    MBD submits that Altis’s conduct after Westpac’s letter dated 2 April 2020 is to be contrasted with its conduct before Westpac provided the indicative term sheet. During that period, Altis (through KKR) negotiated extensively with Westpac on the terms of the loan. According to MBD, if it had used best endeavours, it would have adopted the same approach after 2 April 2020.

33. [104]

    That submission may have had some force if the best endeavours obligation required Altis 2 to obtain a loan from Westpac on any reasonable terms that it could. However, it did not. As I have said, it was plain that Westpac was not prepared to offer a loan on terms that had been proposed originally. There was, therefore, nothing to negotiate. A best endeavours obligation does not require the person who is subject to the obligation to take steps which are futile: Hawkins v Pender Bros Pty Ltd [1990] 1 Qd R 135 at 150–2.

Conclusion and orders

1. [105]

   It follows that Altis 2 was entitled to rescind the Contract on 12 June 2020. Following recission, it was entitled to a return of the deposit of $2,099,000. The deposit is currently held by a third party in accordance with the Contract. In those circumstances, Altis 2 by its amended summons seeks relevantly the following relief:

2. [106]

   The claim is clearly a claim for the recovery of money: see Bloch v Bloch (1981) 180 CLR 390 at 398–9 per Wilson J. Therefore, Altis 2 is entitled to pre-judgment interest on that amount in accordance with s 100 of the Civil Procedure Act 2005 (NSW). That interest is $235,723.56. There is no apparent reason why costs should not follow the event.

3. [107]

   Accordingly, the orders of the Court are:

   1. (1)

      Orders in terms of paragraphs 1 to 2B of the Amended Summons dated 14 March 2022;

   2. (2)

      Judgment for the plaintiff against the defendant in the sum of $235,723.56;

   3. (3)

      Order that the defendant pay the plaintiff’s costs.