GPG Fortitude Valley v Thakral Capital Australia

1. [1]

   HIS HONOUR: The question dividing the parties is whether the plaintiffs (it is convenient to refer to them jointly as “GPG”) have committed an “Event of Default” under a note issue deed made on 14 May 2014 (the original note deed) as varied on 2 April 2015 (the amended note deed). The original and amended note deeds were made to enable notes to be issued by the first plaintiff (the issuer) to the third and fourth defendants (the initial note holders). The notes were issued to raise third tier finance for the purposes of a substantial property development to be undertaken by GPG in Brisbane.

The parties, the development and the central dispute

1. [2]

   As I have said, the first plaintiff was the note issuer. The second plaintiff (the developer) was to undertake the development. The development comprised a number of stages. The third plaintiff (the stage 1 landowner) owned the land that was to be the subject of stage 1 of the development.

2. [3]

   All those companies are controlled by Mr Timothy Gurner. So, too, is another company known as FV No.1 GPG Pty Ltd (the stage 2 landowner).

3. [4]

   The first defendant was the note originator. The second defendant was the security trustee, in respect of security given for the benefit of the noteholders. The third defendant (Diversity) was an original noteholder. Diversity did not agree to the April 2015 variation. The fourth defendant was another original noteholder, and did participate in the variation. It is convenient to refer to the first, second and fourth defendants jointly as “Thakral”.

4. [5]

   The finance provided for the development comprised three tiers:

   1. (1)

      senior debt, $180 million, from a syndicate headed by Australia and New Zealand Banking Group Limited;

   2. (2)

      a mezzanine debt facility of $39.5 million; and

   3. (3)

      an advance from the noteholders, including $16.225 million from Thakral.

5. [6]

   Part of the land required for stage 2 of the development was owned by R.W. Winning (Holdings) Pty Ltd (Winning). In January 2015, the stage 1 landowner contracted to buy that land (the Winning land).

6. [7]

   In early 2015, Mr Gurner decided to separate stage 1 and stage 2 of the development. That involved using a separate company to be the developer of stage 2, and having the land for stage 2 owned or under the control of the stage 2 landowner. It also, of course, required amendment of the original note deed and the associated documentation.

7. [8]

   As part of the process of separation, the stage 2 landowner became the purchaser of the Winning land (this involved rescission of the contract between Winning and the stage 1 landowner, and the execution of a fresh contract between Winning and the stage 2 landowner). The consideration payable by the stage 2 landowner to Winning was $11,700,000. That consideration was to be satisfied by the transfer of property as follows:

   1. (1)

      the stage 1 landowner would transfer land known as the Winning Showroom, having an agreed value of $10,700,000, to Winning on settlement of the purchase of the Winning land; and

   2. (2)

      as to the remaining $1 million, Winning had the option to purchase two apartments in stage 1 of the development for $1,280,000, on the basis that on settlement, Winning would pay only $280,000.

8. [9]

   In effect, by those agreements, when the contract for sale from Winning to the stage 2 landowner was completed, the stage 2 landowner became indebted to the stage 1 landowner for the total consideration.

9. [10]

   The smaller amount, $1 million, was a short-term loan that was discharged by a series of inter-company transactions that need not be described. It is the indebtedness of the stage 2 landowner to the stage 1 landowner for the larger amount, $10,700,000, that lies at the heart of this dispute.

10. [11]

    The original note deed contained a number of negative pledges. They were repeated in the amended note deed. The amended note deed also included, among the plethora of negative pledges and as an exception to the general prohibition on lending, provisions intended to deal expressly with the debts that would arise as between the stage 2 landowner and the stage 1 landowner when the former completed its purchase of the Winning land.

11. [12]

    Clause 17.1(e) of the amended note deed (there was an identical clause in the original note deed, but numbered 17.1(d)) provided that the “Obligor[s]”, including relevantly, the stage 1 landowner, could not deal with anyone except at arms’ length, in the ordinary course of business and for valuable consideration. Clause 17.1(g) provided that, relevantly, the stage 1 landowner could not make loans to anyone, with four specified exceptions, and could not do a number of other things. There had been a similar provision (although numbered 17.1(f)) in the original deed, but it did not contain the specific exceptions that are found in the amended deed.

12. [13]

    The first two exceptions can be put to one side for the moment. The third (cl 17.1(g)(C)) recognised that a loan amount might be owing by the stage 2 landowner to the stage 1 landowner in respect of the latter’s providing the consideration for the transfer to the former of the Winning land. The fourth exception (cl 17.1(g)(D)) related to a debt that might arise between the stage 2 landowner and the stage 1 developer under a separate agreement.

13. [14]

    In essence, GPG contended that cl 17.1(g)(C) was a specific provision which dealt exclusively with the subject of that loan, and that the general prohibition in cl 17.1(e) had no application. Thakral contended to the contrary.

The issues for decision, and approach to their resolution

1. [15]

   The parties agreed on the three issues that required decision. I set out those issues:

2. [16]

   As I have said already, the fundamental question in dispute is whether there has occurred an “Event of Default”. If there has been an Event of Default, the noteholders are entitled to receive a higher return. There is no other relevant consequence.

3. [17]

   It is apparent that if any of the three issues is answered in favour of GPG, no Event of Default has occurred. Accordingly, since I am of the view that, for reasons I shall give, the third issue must be resolved in favour of GPG, I do not propose to spend time dealing with the first and second issues.

4. [18]

   I take that approach because:

   1. (1)

      there were no disputed questions of primary fact;

   2. (2)

      there was no issue as to the credibility of the witnesses of fact;

   3. (3)

      if my decision goes on appeal then, one way or another, all three issues will be re-argued;

   4. (4)

      to the extent that the resolution of the first and second issues depends on inferences to be drawn from uncontested primary facts, an appellate court is in at least as good a position as I am to do so;

   5. (5)

      the resolution of the first two issues really depends on the construction of the relevant provisions of the complex contractual documents, and their application to what are, as I have said, uncontentious facts;

   6. (6)

      the parties’ submissions were expressed very clearly in writing and elaborated in oral submissions that have been recorded in the transcript; and

   7. (7)

      by focusing on what I perceive to be the dispositive issue, the proceedings can be dealt with (at first instance) more expeditiously than otherwise would be the case, and the length of these reasons can be shortened very considerably.

5. [19]

   Thus, I propose to decide the third issue on the assumption that the first and second issues are answered in favour of Thakral. I should however make it quite clear that I do not so decide.

Ruling on admissibility of evidence

1. [20]

   Mr Kevin Barry, the joint managing director of the first and second defendants, swore two affidavits. In one of them, sworn on 9 May 2018, he gave evidence at [67] to [90] of events that had happened after 2 April 2015.

2. [21]

   The evidence covered two distinct period of time, and several different topics. In very broad outline, [67] to [72] dealt with negotiations between Thakral and GPG in the period April to July 2015. The negotiations concerned the possibility that Thakral would provide some finance for the stage 2 development.

3. [22]

   The second time period covered (in [73] to [90]) was December 2015 to December 2016. That evidence concerned negotiations to obtain the consent of the senior and mezzanine lenders to the transactions that were necessary to enable the stage 2 landowner to become the purchaser of the Winning land, and as part of that to enable the stage 1 landowner to provide the purchase price through the transactions that I have outlined at [8] above.

4. [23]

   GPG objected to that evidence. Thakral submitted that it was relevant, and admissible. I ruled that even if the evidence were admissible (a question that in my mind was seriously open to debate), its utility was so minimal that any probative value would be outweighed by the time taken up in dealing with it and the inferences to be drawn from it. Thus, I said, even if the evidence were admissible, I would reject it in the exercise of the discretion given by s 135 of the Evidence Act 1995 (NSW). I added that I would give more detailed reasons. What follows are those more detailed reasons.

5. [24]

   There is no doubt that in some circumstances, evidence of events subsequent to the formation of a wholly written contract may be admissible. One of the purposes for which, it has been said, such evidence may be admitted is if it is probative of antecedent surrounding circumstances of a kind that may be taken into account in the construction of the contract. See the judgment of Allsop P in Franklins Pty Ltd v Metcash Trading Ltd [1] at [13].

6. [25]

   In the same case, Campbell JA said at [324] that an event occurring after a wholly written contract was made could be used to prove something that is relevant to the construction of the contract. His Honour gave, as an example, an admission by a party to the contract, made after the formation of the contract, of the truth of some fact that was a relevant part of the context within which the contract had been made.

7. [26]

   The difficulty with the particular paragraphs is that any understanding of the extent to which they fleshed out, or could be said to give rise to admissions of, relevant “factual matrix” circumstances would require detailed analysis of the events and of the various documents referred to. That would be a time consuming exercise. In my view, that exercise was likely to divert the court from its primary task: to construe the written contract that the parties made.

8. [27]

   I accept, of course, that there are occasions where evidence of circumstances prevailing before and at the time a contract is made, being circumstances known to both (or all) parties, may be taken into account in the process of construction [2] . It is not necessary to go further and examine the precise uses to which such evidence may be put. However, the theoretical admissibility of that evidence does not take away from the proposition that what is required to be construed is the parties’ written formulation of their bargain.

9. [28]

   In my respectful view, there is a very real danger that an over-zealous pursuit and analysis of evidence of surrounding circumstances may divert the court from its primary task. There is a concomitant and equal danger that the court may be misled into seeking to construe the wholly written factual matrix instead of the contract that emerged from it.

10. [29]

    On reading the relevant paragraphs of Mr Barry’s affidavit, I found it difficult to see what they proved that could be relevant to the process of construction. To overcome that obstacle, one would need to expend considerable time and intellectual effort in analysing the paragraphs closely, and the various documents that they called up. To my mind, the marginal utility of that exercise, as an aid to the task of construction of the written contract, was so minimal that the time taken to perform it could not be justified.

11. [30]

    Accordingly, I rejected the paragraphs in question.

Relevant provisions of the contract documents

1. [31]

   The variation to the original note deed was effected by a deed of variation made on 2 April 2015. That document provided by cl 2.1 that the contract documents would be amended so that they read in accordance with defined annexures. I set out cl 2.1:

2. [32]

   Clause 2.2 provided that the parties to the variation deed who had been parties to the original note deed would be bound by the amended note deed as if they had executed it. They were bound to perform their obligations under it, and gave representations and warranties as expressed in it. There were equivalent provisions relating to the other agreements described in cl 2.1.

3. [33]

   Clause 3.10 of the amended note deed (which was annexure “A” to the variation deed) provided as follows:

4. [34]

   Clause 17 of the amended note deed provided, as I have said, for various negative pledges to be given. Although the debate focused only on a few paragraphs, it is convenient to set out the whole of cl 17.1:

5. [35]

   The “Terms and Conditions of the Notes” (contained in Annexure B of the amended note deed) included a requirement for payments to noteholders. The payments to be made included a “Termination Payment Amount” (cl 2.1) and an “Additional Return” (cl 2.3).

6. [36]

   The Termination Payment Amount was (with an associated defined term) defined as follows in cl 1.1 of the amended note deed:

7. [37]

   The Additional Return is effectively a return calculated in accordance with Annexure J to the amended note deed. Clause 2.3 defined, or gave content to, the integers to be used in that calculation. The only one that need be set out is the item “Project Revenue”:

8. [38]

   Clause 9.1 specified “Events which are Events of Default”. The relevant event is that set out in cl 9.1(b):

9. [39]

   There were many other provisions and definitions referred to in the course of submissions, but what I have set out in sufficient to give content to my decision on the third issue.

The approach to construction of commercial contracts

1. [40]

   So much has been written on this subject in recent years that is unnecessary to go into any great detail. The process starts, and usually finishes, with the language used by the parties. The court must give a businesslike construction to the contentious clauses of the contract – the meaning that, objectively, a reasonable businessperson, cognisant of the relevant background, would understand those terms to have. The terms must be construed in their contractual context and against the relevant factual background. The process of construction should seek to ensure, so far as possible, that all provisions of the contract operate together, and that each is given work to do. The construction must seek to accommodate the evident commercial purpose or object of the contentious provisions. So far as possible, the court should avoid giving those provisions a construction that results in absurdity.

Third issue: Event of Default?

1. [41]

   The pleaded case, as to Event of Default, was that [3] :

   1. (1)

      Thakral was entitled to be paid its percentage of the Additional Return as defined in cl 2.3 of the amended note terms:

   2. (2)

      that Additional Return was to be calculated by reference to Project Revenue, also as defined in cl 2.3 of those terms;

   3. (3)

      the receipts that should go into Project Revenue should include not only the $10.7 million loan amount but also “interest payable thereon”;

   4. (4)

      in those circumstances, the alleged breach of cl 17.1(e) of the amended note deed would have a material adverse effect on the ability of GPG to pay the amount of Additional Return to which Thakral was entitled, so as to result in an Event of Default.

2. [42]

   Mr Dalton of Queens Counsel, who appeared with Mr Sulan of Counsel for GPG, submitted that the onus of proving that there was an Event of Default lay on Thakral, the party alleging it. Mr Dalton referred to the decision of Robb J in Minumbra Lancewood Pty Ltd v AM Lancewood Investment Nominees Pty Ltd [4] at [120]. Mr McEvoy of Queens Counsel, who appeared with Ms Hutchins of Counsel for the defendants, did not contest that proposition in either written or oral submissions. Indeed, Mr McEvoy relied upon the decision of Robb J in Minumbra as authority on another point: the approach to construction of “material and adverse change provisions” (a topic that his Honour considered at [121]).

3. [43]

   Mr Dalton submitted that there was simply no evidence that the suggested breach of cl 17.1(e), even if it were established, could have any, let alone any material and adverse, effect on the ability of GPG to pay to Thakral the required percentage of the Additional Return, calculated in accordance with cl 2.3 of the amended note terms. Mr Dalton submitted, further, that when one looked at the whole of the transaction, the omission of any entitlement to interest was not likely to be material.

4. [44]

   Mr Dalton’s submissions stressed that what had to be shown was the effect (if any) of the suggested breach on the ability of GPG to pay the Additional Return. For that to be shown, he submitted, there would need to be evidence as to the financial position of the project at the time the default occurred, and as to the financial position of GPG. He submitted that materiality was relevant to the question of the ability of GPG to pay whatever the Additional Return might be, not to the amount of the Additional Return itself.

5. [45]

   In those circumstances, Mr Dalton submitted, Thakral’s argument was circular [5] :

6. [46]

   Mr McEvoy did not directly address the question of the impact of the suggested breach on GPG’s ability to pay the Additional Return. His written submissions did suggest that there might be difficulty in recovering the amount of the loan “given that the loan has not been recorded in, made in accordance with, or subject to, a written loan agreement, and has not been secured” [6] . That point was not developed further either in the written submissions or in oral submissions. Instead, Mr McEvoy’s submissions focused on the effect that the suggested breach of cl 17.1(e) would have on the amount of the Additional Return.

7. [47]

   Mr McEvoy posited that an appropriate interest rate on the Interstage Loan (the term that he used, and that it is convenient to use, for the debt of $10.7 million owing from the stage 2 landowner to the stage 1 landowner) would be 25%, and that it should be compounded monthly from December 2016 to December 2019. On the basis of that and other assumptions, Mr McEvoy submitted that there would be a total of $11.9 million to be included in the Project Returns, of which Thakral’s 28% would exceed $3.3 million.

8. [48]

   Thus, Mr McEvoy submitted, the amount was relevantly material.

9. [49]

   The first point to make is that there is no evidence that an interest rate of 25%, compounded monthly or otherwise, would have been an appropriate arms’ length rate to charge, as between the stage 1 and stage 2 landowners, on the Interstage Loan. The second point to make is that if interest had been payable at that (or any other significant) rate, it would have been something to be factored into the stage 2 developer’s calculation of the feasibility of stage 2 of the development. How that exercise might have worked out is something that is unilluminated by the evidence.

10. [50]

    Putting those matters to one side, the fundamental point is that the hypothetical exercise postulated by Mr McEvoy fails to address the proper construction and operation of cl 9.1(b). If that clause is to be engaged, so as to bring about an Event of Default, the breach must be reasonably likely to have a material adverse effect on the ability of GPG [7] to comply with its obligations under, relevantly, the amended note terms. The clause focuses on the ability of each Obligor to meet its obligations, whatever they might be, under the suite of contractual documents to which that Obligor was a party. Of necessity, that exercise requires an understanding of the extent, or content, of each such obligation. That is because, absent such an understanding, the assessment of material adverse effect cannot be made.

11. [51]

    However, cl 9.1(b) does not require an assessment of the effect of the breach on the monetary value of the subject matter of an obligation. Put in terms of present relevance: GPG’s obligation was to pay Thakral 28% of whatever the Additional Return might be. Thus, the cl 9.1(b) exercise takes the obligation as it stands, and inquires whether the Obligor’s ability to meet that obligation has been affected, and if so materially and adversely, by the breach complained of. Clause 9.1(b) is not concerned with the impact of any breach on the quantum of the Additional Return.

12. [52]

    It may be – there is no need to decide – that a breach of cl 17.1(e), in particular by the failure to insist upon interest, may have reduced the amount of the Additional Return. It may be, therefore, that the damages resulting from that breach would equate to 28% of whatever the additional interest should have been. But that was not the case that Thakral argued.

13. [53]

    For Thakral to make good its case of Event of Default, it must show, among other things, how the suggested breach of cl 17.1(e) affected the ability of GPG to pay the Additional Return, and did so in a material and adverse way. As I have said, there was no evidence on that point.

14. [54]

    As to the first of Mr McEvoy’s written submissions (see at [46] above), I note two things. First, it does not appear to fall within the pleadings. Secondly, it is unsupported by any evidence. As to the second of those submissions, it, too, lacks evidentiary support.

15. [55]

    It follows that even if there were a breach of cl 17.1(e) (which would be the case if the first and second issues were answered in favour of Thakral), there would not arise any Event of Default.

Conclusion and orders

1. [56]

   GPG is entitled to declaratory relief. Its summons filed on 7 March 2018 sought alternative declaratory relief: a declaration directed at the event of success on the question of construction (the first and second issues), or a declaration directed at success on Event of Default (the third issue). For the reasons I have given, GPG is entitled to a declaration to the effect that there has been no Event of Default arising out of the Interstage Loan.

2. [57]

   I see no reason why costs should not follow the event.

3. [58]

   I make the following orders:

   1. (1)

      declare that for the purpose of cl 9.1(b) of Annexure B – Terms and Conditions of the Notes to the Note Issue Deed being Annexure “A” to the Variation Deed made between the plaintiffs, the defendants and others on 2 April 2015, there has been no Event of Default arising because:

   2. (2)

      Order the defendants to pay the plaintiffs’ costs.

   3. (3)

      Direct that the exhibits be returned.