Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd

The plaintiff’s claim against the defendants is for damages for the alleged repudiation by one of them of a contract in which the relevant defendant agreed to enter into an agreement to lease, and then a lease, of premises owned by the plaintiff, for the purpose of conducting a supermarket business. The plaintiff says it terminated the contract upon the basis of the repudiation by the defendant.

The plaintiff is Harold R Finger & Co Pty Ltd (Finger). Finger has at all relevant times been the owner of the property at 21 – 23 Erskineville Road, Newtown (the Property). Finger was represented in its dealings with the defendants by Harold Finger and his son, Ben Finger. Ben Finger undertook most of the negotiations and communications with the defendants on behalf of Finger.

There are two defendants, Karellas Investments Pty Ltd (Karellas Investments) and Karellas Group Pty Ltd (Karellas Group). There is an issue in the proceedings as to which of the defendants was a party to the contract upon which Finger sues, if there was such a contract. The uncertainty arises because the document that is said to constitute the contract refers on most occasions to “Karellas Group”, without specifically naming any party, or using the words “Pty Ltd” as part of the description of the party on behalf of whom the l document was signed. I will use the word “Karellas” in situations where it is convenient to refer to the defendants generally, without identifying a specific defendant.

In par 6 of its statement of claim Finger alleges that Karellas Investments was the party to the contract “or, in the alternative” Karellas Group. Accordingly, Finger claims that one or other of the two defendants was the party, not both of them.

Vasilli Karellas and Andrew Karellas represented Karellas in their dealings with Finger. Both were directors of Karellas Investments and Karellas Group.

Finger’s statement of claim was filed on 30 May 2012. The following analysis focuses on the allegations in the statement of claim that are primarily relevant to the matters in issue between the parties.

Finger alleges in par 5 that, by a document dated 21 December 2009, Finger made a contract with Karellas Investments or, in the alternative, with Karellas Group. I will generally call this document the “heads of agreement”. It started out as a letter of offer dated 21 October 2009 sent on behalf of "Karellas Group" to Finger. After negotiations, and the making of a number of amendments, the final version of the letter of offer was signed on behalf of Finger and "Karellas Group" and dated 21 December 2009, although the signing of the final version of the document took place at a later date. The parties called the document the “heads of agreement” during the proceedings).

The primary obligation upon Karellas under the contract is alleged in par 7 in the following terms:

The part of this allegation that is of most significance is the use of the words "and otherwise on the terms and conditions set out in the contract" to describe the terms of the lease (other than the identification of the subject premises and the term in years). Finger’s allegation is that all of the other terms and conditions were either set out in the contract, or they could be determined following the performance of an obligation imposed on the parties to settle the formal documentation.

The particulars to par 7 identify, as the particulars of the alleged contract, the 21 December 2009 heads of agreement, the then current approved plans for the reconstruction of the building on the Property referred to in the heads of agreement, and terms implied by the express terms or implied as a matter of law.

Finger then sets out in par 8 the terms of par 24 of the heads of agreement:

While in par 7(1) of the statement of claim Finger alleges that the lease terms were to be "otherwise on the terms and conditions set out in the contract", clause 24 of the heads of agreement stated that the agreement for lease would be based on the Karellas Group standard documentation, including the commercial terms in the letter. Paragraph 9 of the statement of claim sets out the terms of par 22 of the heads of agreement. That term states that the offer has been approved by the Karellas Group Board. That approval would be operative for a period of 12 months. If formal documentation was not executed within that time, Karellas Group could elect to terminate the agreement and withdraw from the project.

Finger alleges in par 10 that it follows from the terms alleged in pars 8 and 9 that the parties were subject to implied obligations to act reasonably, and within 12 months of the date of the letter to settle the terms of formal documentation for an agreement for lease "embodying the terms and conditions set out in the contract (with such variations or further terms as the parties might subsequently agree on)”; and to execute the formal documentation.

Finger alleges in par 11 that the terms alleged in par 10 were essential terms of the contract.

In par 12 Finger pleads that, between December 2009 and June 2010, the parties carried out negotiations with a view to reaching agreement on variations to the agreed terms and reaching agreement on additional terms, and settling the terms of the formal documentation "embodying the terms and conditions set out in the contract and the varied and additional terms that were agreed to".

Paragraph 13 pleads the terms of an email sent by Vasilli Karellas to Ben Finger on 8 June 2010. The email said: "The conclusions in the report obviously changes [sic] the basis that we have been proceeding [sic]. With this level of turnover and on the proposed lease terms the business is not viable for us."

Finger then pleads in par 14 the effect of a letter dated 9 June 2010 from Karellas’ solicitor to the solicitor for Finger, which is the letter that Finger alleges was, together with the email of the previous day, a repudiation of the contract by Karellas. The precise allegations made by Finger should be set out:

Finger then alleges in par 15 that, by the statements in Vasilli Karellas' 8 June 2010 email and the solicitor's 9 June 2010 letter (being the communications referred to in pars 13 and 14 of the statement of claim), Karellas repudiated the contract. It did so because it:

Paragraph 15(1) reinforces the conclusion that the statement of claim alleges that, unless there were variations or further terms to which the parties actually agreed, the terms of the lease were to be those required by the heads of agreement.

Finger pleads in par 16 that, by its solicitor's letter dated 16 August 2010, it expressly accepted Karellas' repudiation, and terminated the contract, with the result (as alleged in par 17) that it lost the benefit of the contract, and otherwise suffered loss and damage.

On about 16 May 2011 Finger entered into an agreement for lease with Woolworths Ltd (par 18). Finger’s claim for damages is set out in Schedule 1 to the statement of claim. The total loss claimed is $3,191,868, constituted by the difference between the net present value of the rent and other payments that Karellas agreed to pay, and the net present value of the rent and other sums payable by Woolworths under its lease, plus interest, plus other consequential losses. I will consider Finger’s damages claim separately below, in relation to the schedules handed up by Finger in final submissions.

It is necessary to take note of a number of matters that were not pleaded by Finger in its statement of claim, which appear to be relevant to the matters in issue between the parties, and the manner in which the case was conducted.

First, Finger did not plead that, at some date before the alleged repudiation of the contract by Karellas, the parties following their negotiations had come to a concluded and binding agreement about varied and additional terms to be included in the formal documentation, other than the terms required by the heads of agreement. Finger merely acknowledges that the final agreement for lease and lease terms could include varied or additional terms, and it pleads that the parties carried out negotiations with a view to reaching agreement on variations and additional terms to the agreed terms. It did not plead the content or result of those negotiations, and did not allege that any agreements were concluded so that the terms in the heads of agreement were varied in a way that bound the parties.

Secondly, Finger did not plead that, in fact, the conclusions reached in the market analysis report referred to by Finger in pars 13 and 14(3)(b) of its statement of claim were correct, so that the supermarket would not have been viable, if undertaken under a lease containing the terms required by the heads of agreement. The plaintiff only pleads (in par 13) that Vasilli Karellas' 8 June 2010 email said that "the business is not viable for us".

As I have noted, one of the particulars of the contract given by Finger was the then current approved plans for the making of alterations to the existing building, referred to in the heads of agreement. I will call this development approval the “Original Development Approval”.

At the date of the heads of agreement there was erected on the Property an older style commercial warehouse building that covered substantially the whole of the site (the Building). The Property was of irregular shape with six sides, five of which adjoined a number of roadways, and the sixth adjoined a neighbouring factory. The other sides abutted Erskineville Road, Gowrie Street (two sides), Railway Lane and Angel Lane. The Building had an older style sawtooth roof. The roof was apparently of relatively light construction, and the evidence shows that only two structural columns were necessary to support the roof in the part of the Property that was proposed to be used as the trading area for the supermarket. An area within the Property was set aside as a car park. Vehicular access could be gained to the car park along Gowrie Street from Erskineville Road in one direction and along Angel Lane and Railway Lane from the other. That access appears to have been relatively confined. The Property is located in the inner City of Sydney, at Newtown, between Newtown and Erskineville railway stations. That is a busy area of the City, with relatively limited parking opportunities.

The Original Development Approval was granted by the City of Sydney to operate from 24 September 2009, in accordance with Development Application No D/2009/537, dated 20 April 2009. It was granted in respect of a series of drawings by Brian Meyerson, an architect, dated 6 April 2009, and described as “Revision B”. One of the conditions upon which the approval was given was that only hand-held baskets could be provided to customers of the supermarket, and the use of trolleys was prohibited.

Ben Finger provided the DA consent conditions, as well as the survey of the Property, to Vasilli and Andrew Karellas, as attachments to an email dated 23 October 2009. He said: “You can see presently there are only two columns within the trade area floor plate, but as discussed this will change to allow for any future upper level”. Ben Finger sent the plans approved by the Council to Vasilli and Andrew Karellas on 27 October 2009. These plans, being Revision B, provided for a trading area abutting Erskineville Road, a single storey back office behind the trading area, a loading area, and space for parking 16 cars.

At the beginning of the negotiations between Finger and Karellas, Ben Finger provided plans for what was called the “Newtown Project” to Vasilli Karellas on 17 September 2009. (He also provided plans concerning Finger’s proposed development at Botany, which Karellas were apparently also considering. That opportunity was not pursued by Karellas, and is not material to the dispute).

The plans provided on 18 September 2009 were called Revision C. A number of features of Revision C appear to be significant to the present dispute. The ground floor plan shows an area abutting Erskineville Road described as “area for future access to upper floor 22 m²”. It also shows an area on the same side of the building, but at the back of the back office, described as “area for potential substation… 15 m²”. Both of those areas are excised from the larger area described as “trading area & back office”. No structural columns are shown in the trading area and back office. There is a loading area behind the trading area and back office, between that area and the parking area. The position of the wall between the loading area and the trading area and back office appears to have been moved in comparison to the plans approved with the Original Development Approval, in a way that increases the floor area of the trading area and back office. There appear to be four structural columns in the parking area, and as I understand it, provision is made for the construction of a number of walls in connection with a staircase within the parking area, that would give access to a plant room on the roof. The area for the back office is a single level, without a mezzanine floor.

Revision C allows for the construction of what is described as “proposed Bondeck slab” (see Ex A 1374). The slab is only shown as being constructed over the trading area and back office. There is no Bondeck slab at the first floor level above the loading dock and car park. I infer that the intention in providing for the slab was to permit Finger to undertake further development of the Property at a later time, and was intended to form the base for any further development above the trading area and back office. As I read the plans approved by the Council in relation to the Original Development Approval, they did not allow for the construction of a new roof slab. Revision C shows a new ceiling to be constructed over the trading area, the back of house and the loading area. The Original Development Approval allowed for the construction of this new ceiling. The new ceiling is shown under the proposed Bondeck slab. Revision C shows an existing slab over the car park that appears to create a mezzanine level over the car park. The notes state that this existing slab is to be retained.

Revision C also contains the following statement in respect of the area generally used as the car park: “existing area – no use proposed”.

The aspect of Revision C that only places the Bondeck slab over the proposed trading and back office areas would suggest that any future additional development to take place over the Property that required a concrete slab as a base would only take place over the trading and back office area. That conclusion is reinforced by the statement that no use was proposed in respect of the car park area, as to which there would, in any event, be no superimposed concrete slab.

This is a convenient point to note that Finger claimed in final submissions that Karellas knew from day one there was an intention to put a slab on top, and to do an upper level development of some kind (T 112). Finger also submitted that Karellas “must’ve been aware of what the scope of it was; the whole top storey was going to be done” (T 113). Finger referred to clause 3.50 of the first draft of the lease that was prepared before the heads of agreement was executed. This provision contemplated a general reservation by Finger of the right to alter the Building (other than the area proposed to be leased to Karellas (the Premises)). The clause did not contemplate any particular development. Having regard to Revision C, there was an intention to put a slab on top, but only on top of the trading and back office areas. Finger has not made good its claim that from the outset Karellas knew that Finger had an intention to put a first floor slab over the whole site area of the Property, and to construct a further development over the whole of that area. There is no evidence that, by the date of the heads of agreement, Karellas were made aware that Finger retained the right to further develop the Property in a way that would require any different slab at first floor level than was depicted in Revision C, or to develop the car park and loading dock areas for any new use.

As I have noted above, on 17 September 2009, Ben Finger sent to Vasilli Karellas an email that attached plans for Finger’s Botany and Newtown projects.

On 15 October 2009, Ben Finger informed Vasilli Karellas that the total gross floor area, of what I understand to be the trading area and the back office, was 841 m².

On 21 October 2009, Andrew Karellas sent an email to Ben Finger in which he stated: "We are pleased to make the following offer for rental on 21 – 23 Erskineville Rd Newtown". The email attached a letter of offer, “One Concept layout plans for store”, and a design brief.

The letter of offer is on the letterhead of "karellasgroup", under a wavy line device. The letter is marked "Subject to Karellas Group board approval". Karellas Investments Pty Ltd is nominated as the tenant. The rent is specified at $675 per square metre per annum gross. Provision is made for the letter to be signed by Andrew Karellas as a director of "Karellas Group".

The letter of offer contained the following clause 15:

As will be seen, the final sentence of this draft clause 15 was deleted from the version of the heads of agreement that the parties signed.

It also contained a clause 17 concerning “Amenity Provisions”. Only the first two paragraphs of the draft clause 17 set out below survived into the final version of the heads of agreement.

The single page layout plan attached to the 21 October 2009 email depicts five rows of supermarket bays containing 174 bays. (The parties used the term “gondolas” to refer to these bays). The 22 m² area excised from the previous plans is described as "owners area for future access to upper floor". No structural columns supporting the roof are shown. The layout plan provides for an area described as "trolley park".

The “design brief" is dated 7 October 2009, and sets out "Karellas Investments Building Requirements" for technical matters including hydraulic services, roller shutter/sliding doors, identification signage, fire services, mechanical services and electrical and communication services.

On 27 October 2009, Karellas' accountants, Walter Turnbull, sent a letter to Finger "to provide a statement of financial position for the purposes of securing a lease for the commercial property at 21 – 23 Erskineville Road”. The letter advised that the Karellas Group operated three supermarkets at Cremorne, Blaxland and Pyrmont through "the Karellas Family Trust # 3”. The letter stated:

The letter did not identify the company or other entity that was the trustee of the Karellas Family Trust #3.

Walter Turnbull sent a further letter to Finger’s accountant on 28 October 2009. The letter gave the gross sales and net trust profit for Karellas Family Trust No. 3, for operating its three existing supermarkets for each of three years as follows.

On 29 October 2009, Mr David Toole, solicitor, who said that he was acting for the Karellas Group, forwarded to Harold Finger by email an incomplete draft agreement for lease, which contained a draft lease in the fourth schedule. The draft agreement for lease that was attached referred to Karellas Investments as the tenant, and provided for signature by that company. The draft lease also described the tenant as being Karellas Investments.

Mr Toole stated in his email that he had received instructions to prepare the agreement for lease and the lease, and that he had almost finished the draft lease. He expressly noted that the attached agreement for lease was only a draft, and said: “I have not had an opportunity to confirm my instructions as to the terms of the Agreement”. A copy of the email was sent to Vasilli and Andrew Karellas. It is a common practice for solicitors to send draft agreements to the party for whom they do not act, on the basis that the draft is subject to the client’s instructions, when solicitors are confident that the client is likely to approve the terms of the draft in substance, and that the draft does not contain terms that the client will be likely to reject, or consider to be damaging to the client’s bargaining position. There is no evidence that Vasilli or Andrew Karellas expressed any objection to any of the terms in the draft agreement for lease, before the heads of agreement was signed.

The draft lease that was included in the draft agreement for lease and which was apparently intended to be the fourth schedule to the draft agreement for lease) contained a clause 14.12 called "Alterations to the Building", which provided:

Clause 14.13(c) permitted the Landlord, subject to clause 10.1, to enter upon the Premises and to use the whole or any part thereof for carrying out or effecting any of the works contemplated by clause 14.12.

The reference to clause 10.1 appears to be in error, as that provision has no apparent relevance, and clause 11.1 is a covenant by the landlord for quiet enjoyment.

By a further email dated 29 October 2009, Mr Toole sent another first draft lease to Harold Finger, which contains some different terms to the draft lease that was provided as a schedule to the draft agreement for lease.

Clause 3.50 is in the same terms as clause 14.12 of the earlier draft lease. Clause 3.51.1.1.1 has the same effect as clause 4.13(a).

Clauses 3.112 to 3.119 are found under the heading "Strata conversion & stratum conversion". Relevantly, they provided:

"Building" is defined in Schedule 1 to the draft Lease as meaning

It appears that the solicitor has adapted documents that concerned a proposal that Karellas Group would lease different premises in Redfern.

The terms of these initial draft documents prepared by Karellas’ solicitor have significance for an important issue that will be considered below. In the context of considering the issue of whether the heads of agreement constituted a concluded and binding contract, it will be necessary to consider whether the document was sufficiently complete to enable the heads of agreement to provide the basis for an enforceable contract, particularly in respect of covenants to protect Karellas in relation to any future additional development of the Property that Finger might carry out. In that respect, as will be seen, it may be significant that clause 24 of the heads of agreement provide that the formal documents will be “based on the Karellas Group standard documentation, including the commercial terms in this letter”. That will give rise to the question whether Karellas had standard documentation, and whether that documentation contained provision for future alterations to the Property by Finger. The point for present purposes is that, as I have noted, there is an appearance from the reference to the premises in Redfern that Karellas’ solicitor was using Karellas’ standard documentation, as a precedent for his draft documents. Those draft documents do contain covenants that deal with the issue of the future development of the Property.

Mr Toole sent a second draft of the letter of offer to Harold Finger on 30 October 2009. The draft was now headed "Binding heads of agreement". The chapeau to the numbered paragraphs had been changed from "we have pleasure in presenting this offer" to "we have pleasure in presenting this binding offer". The draft amended clause 1, concerning Premises, refers to the annexure of a copy of the current approved plans. (As has been considered above, the approved plans for the Original Development Approval were Revision B). Clause 1 contains a statement: “This offer is based on the plans (Reference DA 15 Revision C dated 1/10/09)”. It changes the lettable area to approximately 863 m², which includes the area of 22 m², which was originally intended to be excised from the demised premises to give the plaintiff access to the upper floor for the purpose of some future development of the Property. It notes that the landlord had reserved the right to excise this area from the area subject to the lease. If that right was exercised, the landlord was required to pay all costs, and the rent was to be reduced proportionately.

An email dated 2 December 2009 from Harold Finger to Vasilli Karellas made the following relevant requests for amendments to the draft letter of offer:

The last amendment set out above was the only change sought to the draft clause 15.

Vasilli Karellas responded to this email on 10 December 2009, to advise that he would consider the new terms, and that the offer in the heads of agreement had lapsed. Following receipt of this email, Harold Finger suggested on 11 December 2009 that the most appropriate way to discuss the heads of agreement was for him and Ben finger to discuss the outstanding issues in person with Andrew and Vasilli Karellas.

That meeting occurred on 14 December 2009. During the course of the discussion hand written amendments were made to the draft of the heads of agreement dated 2 November 2009. At the end of the process, the amended draft was signed, and the bottom of each page initialled, by Harold Finger and Vasilli Karellas, and dated. Vasilli Karellas signed in the capacity of director “Karellas Group”.

Relevantly for present purposes, the following amendments were agreed, and the requisite changes made to the draft letter of offer.

The rent was reduced from $675 to $620 per square metre per annum gross.

The second paragraph within clause 11, called "Design Brief", had originally provided: "Suitable areas for the convenient storage of trolleys and the placement of communications equipment must be provided in locations outside the Premises". It was changed so that the reference to "trolleys" became "trolleys/baskets", and the words "must be provided in locations outside the Premises" were deleted.

In clause 15, concerning the "Master Plan", the sentence "If further development is proposed, it must be shown on a master plan, approved by Karellas Group, and included in the documentation" was deleted.

Additionally, the wording in clause 17 under the heading “Site Plan”, which had appeared in earlier versions of the draft heads of agreement, was omitted. That had the effect, that, where the first paragraph of clause 17 refers to provisions relating to “preservation of the arrangements shown on the site plan referred to below”, there was in fact no reference to such a site plan. The provision concerning the site plan was deleted in the final version of the heads of agreement.

Subsequently, an engrossment of the heads of agreement dated 21 December 2009 was prepared, and executed by Harold Finger and Andrew Karellas. (The document was actually signed on behalf of the parties later on about 19 January 2010). It relevantly provided:

Clause 1 of the heads of agreement refers to the attachment (marked “A”) of the then current approved plans. There were no plans annexed to the final version of the heads of agreement. The omission was not explained. It may be because Revision C was an evolution of the approved plans, and clause 1 makes it clear that Revision C was intended to be the operative plans.

It must be noted that Revision C was a plan of the whole Property, and not just the Premises that were proposed to be leased to Karellas. The whole of the Property was of prime interest to Karellas because, although it would only take a lease of the Premises, it needed the use of the car park, the loading dock, and the plant room, for the successful operation of the proposed supermarket. Clause 1 referred to amendments, redesigns or changes to configuration of the whole Property.

Clause 22 expressly gave Karellas a right to terminate the agreement if the formal documentation was not executed within 12 months. Nothing is said expressly about Finger having a similar right. However, there is also a statement that: “The approval … will be operative for a period of 12 months from the date of this letter”. It could not have been intended that Karellas alone could have terminated, but Finger would be left in indefinite limbo. The proper way to construe clause 22 is that it impliedly gave to Finger the same right that it expressly gave to Karellas.

The heads of agreement dated 21 December 2009 differs from the letter of offer with the handwritten changes that was dated 2 November 2009 and signed on 14 December 2009 in a number of respects.

First, the words at the beginning of the latter "BINDING HEADS OF AGREEMENT" were deleted from the heads of agreement.

Secondly, the last two paragraphs of clause 2 in the document dated 21 December 2009, concerning a further reduction in rent during the refit period, if the landlord elected to use the 22 m² of excised area, and the extra storage that may be made available in the car park, were added.

Finally, in clause 3 concerning the tenant, in the earlier letter of offer Karellas Investments Pty Ltd was the only tenant identified, but this had been changed in the heads of agreement to "Karellas Investments Pty Ltd… or Nominee".

The problem that must be addressed is: assuming for the present that the heads of agreement is capable of being a final and binding contract, which of the Karellas companies was party to it?

The problem arises because the term “Karellas Group” was used most frequently in the heads of agreement to describe the relevant Karellas entity, but there are other indications that point inconsistently to one or the other Karellas company being the party. (Even Mr Toole described himself as acting for “Karellas Group” in his 29 October 2009 communications).

Finger submits that Karellas Investments was the party to the heads of agreement; and in the alternative, that Karellas Group was. Karellas submit that Karellas Group was the only party, if there was a binding contract. The evidence does not show why the parties make these inconsistent submissions, and it would not be appropriate for the Court to speculate as to the reason.

It will be necessary first to consider the legal principles that govern how the parties to a contract should be identified.

In Air Tahiti Nui Pty Ltd v McKenzie [2009] NSWCA 429; (2009) 77 NSWLR 299 at [28], Allsop P and Handley AJA in a joint judgment (Hodgson JA agreeing) said the following:

The Victorian Court of Appeal in Lederberger v Mediterranean Olives Financial Pty Ltd [2012] VSCA 262; (2012) 38 VR 509 at [19] put the principle in the following way:

There is also a question of whether, and if so how, the Court may have regard to the conduct of the parties after the date of the contract to identify the intended parties.

The Court of Appeal in Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 left open the question whether it is permissible to look at post-contractual communications and conduct in order to determine whether a contract with a particular party existed: at [2] (Basten JA); at [59] (Campbell JA, Beazley JA agreeing).

In Tomko v Palasty [2007] NSWCA 25, Basten JA (Mason P agreeing) added that “[e]xcept to the extent that [subsequent conduct of the parties] constitute admissions by one or other party, they are largely equivocal”. In that same case, Einstein J (Mason P agreeing) considered the Pethybridge case and found that “evidence of post-contractual conduct is admissible on the question of whether a contract was formed”: at [67]. In his Honour’s view (at [68]), that meant that:

In Lederberger, the Victorian Court of Appeal considered the question whether the trial judge erred in determining the identity of the parties by reference to post-contractual conduct. The Court set out the key principles elucidated by Heydon JA (as he then was, Mason P and Ipp AJA agreeing) in Brambles Holdings Pty Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 163-4, particularly the following:

The Court accepted an argument that the general principle in contractual interpretation does not permit the use of post-contractual conduct of the parties as an aid to the construction of the contract. The Court continued (at [31]):

There are a number of facts that were known to the parties that occurred before the heads of agreement was signed that form part of the context that is relevant to the answer to this question.

The design brief dated 7 October 2009, that Andrew Karellas sent to Ben Finger as an attachment to an email on 21 October 2009, was described as “Karellas Investments Building Requirements”.

The draft agreement for lease that Mr Toole sent to Harold Finger on 29 October 2009 made provision for Karellas Investments to be nominated as the party, and for the agreement to be executed on behalf of Karellas Investments.

Both of these events would tend to suggest to Finger and its solicitor that the intention was that Karellas Investments would be the contracting party.

Against that, as I have mentioned, in his 29 October 2009 email, Mr Toole said that he acted for “the Karellas Group”. He did not add the words “Pty Ltd”. The use of the word “the” in the description of the client would ordinarily suggest that Mr Toole acted for a group of companies in the commonly understood meaning of that expression; that is, a parent or holding company and a number of companies that were its subsidiaries. Unfortunately, Mr Toole’s description of his client is unhelpful. There is no evidence that the two Karellas companies formed a group in that commonly understood sense, or that any of the persons involved had that understanding. The two companies were in effect sister companies, in the sense that the shares in each were owned by persons who appear to be related (as they had the surname Karellas).

The heads of agreement is on the letterhead of “karellasgroup” and the letter contains a provision for signature that shows that it was intended to be signed on behalf of “Karellas Group”.

It is true that “Karellas Group” is part of the name of Karellas Group, but it does not necessarily follow that the use of the expression was intended to refer to that company, with the words “Pty Ltd” simply being omitted. In all the circumstances the use of the expression “Karellas Group” appears most likely to be the result of unfocused thinking, and a failure by all of the persons concerned in the preparation of the heads of agreement to give proper attention to an essential detail. Notwithstanding what I have said above about their not actually being a Karellas Group within the ordinary meaning of that expression, the loose use of the term Karellas Group seems to refer to the Karellas interests (whatever they might be).

By far the greatest number of references in the heads of agreement is to “Karellas Group” (letterhead, footer, clauses 1, 8, 9 (×3), 10 to 16, 20 to 23 and 25). There is a reference in clause 2, clause 19 and clause 24 to “the Karellas Group”. Clause 22 contains a reference to “the Karellas Group Board” as well as a reference to “Karellas Group”.

Clause 18 concerns car parking and initially refers on two occasions to “Karellas Group”. It then, however, refers specifically to “Karellas Group Pty Ltd” in relation to who will manage customer parking, and that the “car park must be completed upon handover to Karellas Group Pty Ltd”.

Karellas Investments is also referred to in clause 3 of the heads of agreement, which identifies the proposed tenant in the following terms: “Karellas Investments… or Nominee”. In so far as the reference in clause 18 to the car park being handed over to Karellas Group Pty Ltd suggests that that company was intended to be the contracting party, it is arguably inconsistent with clause 3, which specifies Karellas Investments or its nominee as the tenant. An initial reaction to the specific naming of Karellas Group Pty Ltd in clause 18 may be that it is a conclusive indication, given the general muddle, that indeed Karellas Group was the party to the heads of agreement. The difficulty with that reasoning is that clause 18 speaks of Karellas Group managing the customer parking, but the primary indication was that Karellas Investments would be the tenant, and there is no reason to think that it was actually intended that Karellas Investments would operate the supermarket, and Karellas Group would separately manage the car park. Upon reflection, the specific identification of Karellas Group Pty Ltd in clause 18 appears to be more the result of muddled drafting than of conscious thought.

I have noted above that Karellas’ accountant provided Finger with some financial information concerning the operation of the other three supermarkets operated by Karellas. However, the letter did not identify the trustee of the operating trust. Accordingly, it does not provide any assistance in determining the intended Karellas party to the heads of agreement.

The enquiry is not assisted by any evidence concerning the respective business operations of Karellas Investments and Karellas Group. It is not possible to reverse engineer from an understanding of how Karellas went about their respective businesses a conclusion as to who was intended to be a party to the agreement. (This information would be irrelevant, in any event, unless it was known to Finger).

There is some evidence concerning the steps taken by Karellas after the date of the heads of agreement that supports a conclusion that the party to the heads of agreement was Karellas Investments. For example, on 14 January 2010, Karellas’ consultant, Michael Briscas, sent an email to Finger’s consultant, Roy Vigdor, (with copies to Andrew and Vasilli Karellas) which refers to “the revised KI Requirements document”. On 14 January 2010 in another email to Mr Vigdor (again copied to Andrew and Vasilli Karellas), Mr Briscas accepted, on behalf of Karellas Investments, the final scope of works schedule setting out the landlord’s and tenant’s works. In a similar way on 15 January 2010 Mr Briscas accepted on behalf of Karellas Investments the final form of Karellas Investments Building Requirements. These two documents were intended to become schedules to the agreement for lease.

On 3 February 2010 Mr Toole sent a draft lease to Mr Reid. The subject of his letter is described as “Karellas Investments Pty Ltd agreement for lease…” He states that “I am acting for Karellas Investments Pty Ltd”. Karellas Investments is noted as the tenant in the attached draft lease.

The proposition that Karellas Group was intended to be the contracting party, even though Karellas Investments or nominee was identified as the proposed tenant, would suggest that it was Karellas Group that had the right and obligation to participate in the settlement of the terms of the formal documentation. However, the subsequent conduct that appears in the evidence suggests that the settlement of the terms was done on behalf of Karellas Investments. Karellas Investments actually exercised the rights to agree aspects of the necessary documents. These actions are capable of being admissions made by Karellas Investments, because they were undertaken by its solicitor or by its consultant with the implied agreement of Andrew and Vasilli Karellas (because they received the relevant communications and did not demure). The examples that I have given may not be comprehensive, but I do not understand that there are any equivalent examples, that suggest that Karellas Group participated in agreeing the final form of relevant documents.

The difficulty between choosing Karellas Investments or Karellas Group, as the one contracting party, is that arguments of relatively equivalent strength can be made in favour of each possibility. As to Karellas Investments, that company was consistently proposed as being the ultimate tenant, and the actions that were taken to implement the heads of agreement were consistent with Karellas Investments being the party to the agreement. On the other hand, it is difficult to ignore the frequent use of the expression “Karellas Group”, and the fact that Karellas Group Pty Ltd is mentioned in the document.

With some hesitation I have concluded that the better view is that Karellas Investments was the Karellas party to the heads of agreement, assuming that it constituted a final and binding contract. It was that company which was identified in the draft documents that were circulated before the date of the heads of agreement. Karellas Investments, or its nominee, was identified as the proposed tenant. While it is by no means unknown to commerce that company A will enter into an agreement with company B to procure that company C will enter into a lease with company B of that company’s property, it is an unusual arrangement. The Court should not readily conclude that an arrangement of this nature was intended by the parties, in the absence of evidence of circumstances known to the parties that would establish the commercial rationale for one company being liable to procure another company to enter into a lease. There is no evidence of such circumstances in the present case. Although it may not invariably be the case, normally people in commerce would take it for granted that the company that intended to become the tenant, and operate the business from the demised premises, would be the company that entered into any agreement intended to lead to the lease being granted. That way the proposed tenant would have a contractual right to secure the desired lease. Expenses incurred in procuring the lease would be the deductible expenses of the tenant. I have also been influenced in favour of this conclusion, without this factor being in any way decisive, by the fact that, after the date of the heads of agreement, the parties proceeded in a way, as if it was taken for granted, that Karellas Investments had the right to participate in the settlement of all necessary documents. The reference to Karellas Group Pty Ltd in clause 18 of the heads of agreement, concerning the operation of the parking area, is not of great significance because, as I have observed above, there is no reason to think that Karellas intended that Karellas Investments would be the tenant, and Karellas Group would separately operate the car park. As to the frequent use of the expression “Karellas Group”, I have concluded that that was inconclusive, and simply reflected a lax approach by Karellas that ignored the importance of identifying individual companies for the purpose of the proper implementation of transactions.

There is an alternative way of dealing with the identification of the Karellas party to the heads of agreement which is, in my view, equally valid, and leads to the same result. That is that, having regard to the objective references to “Karellas Group” and the two Karellas companies in, before, and after the heads of agreement, both Karellas companies were bound to perform the heads of agreement. Put another way, neither could deny that it was so bound, at the suit of Finger. That conclusion does not depend upon estoppel, as that was not pleaded. It arises from the objective effect of the muddled way in which the issue was addressed by Karellas. As I have said, the better way to understand the repeated use of “Karellas Group” is that it was intended to mean “the Karellas interests presently involved”. This approach gives proper effect to the use of “Karellas Group”. Furthermore the actual names of both Karellas companies were used essentially in an inconsistent way. Finger was entitled to sue either Karellas company as the party liable. Its naming the Karellas companies in the alternative in its pleading does not preclude this course. Karellas raised no issue as to the consequences of the companies not being sued jointly.

As I have reached the conclusion that Karellas Investments was intended to be the party to the heads of agreement, logic would suggest that henceforth I would refer to Karellas Investments, rather than to Karellas, as I have above. However, given the murkiness of the issue of which Karellas company was intended to be the contracting party, it will be convenient to adhere to the approach that I have taken above. References to “Karellas” will, however, be to Karellas Investments, wherever the term refers to the party to the heads of agreement.

Karellas deny in their defence any liability to Finger. First, in par 1(a) of their defence, they deny that the heads of agreement constituted a concluded and legally binding contract.

Karellas gave the following particulars as to why the letter of offer was not legally binding. It was, so they allege, no more than an agreement to enter into an agreement for lease.

The first reason given is that, under clause 1, "Karellas Group reserves the right to amend this offer" in the event of "further amendments, redesigns or changes to configurations" of Revision C.

Secondly, Karellas say that "significant terms were not agreed, namely the final development program required under clause 12, the development works which Finger would carry out under clause 15, and the covenants required under clause 17.

Thirdly, Karellas say that "under clause 21, [Finger] must acknowledge that Karellas Group's agreement to proceed is based upon [Finger’s] commitment to the project and [Finger’s] development programs'".

Fourthly, Karellas rely upon clause 22, in so far as it says, the "offer is subject to finalisation of development plans, programming, Scope of Works, specification and finishes to Karellas Group satisfaction".

The first question is whether the parties intended immediately to be bound contractually when they signed the heads of agreement, or whether they intended that no contract would arise until some later event occurred.

I am indebted to Sackar J for his collection of the relevant principles, with which I respectfully agree, in Lahodiuk v Pace [2013] NSWSC 512 at [13] to [21]. His Honour said:

It appears that the nature of the contract alleged by Finger in the present case is the first of the two situations described by Giles JA in Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 at [66] in the following terms:

I note particularly the observation made by Giles JA that the guiding principles “are subservient to the fact-specific objective finding of the parties’ intention”, with which I respectfully agree. It is apposite to the present case.

It is Finger’s case that the heads of agreement identified all the essential terms of an agreement for lease and a lease, and provided a sufficiently certain foundation for an implied obligation on the parties to cooperate reasonably to settle formal documentation, based upon the contents of the heads of agreement. The parties could agree to varied or additional terms, but if the process of settling the formal documentation became protracted, or broke down, either party could insist upon a reversion to the settlement of the formal documentation on the terms required by the heads of agreement.

Karellas’ response is that the heads of agreement was not a binding agreement to take a lease on particular terms, but it was an agreement to negotiate exclusively and confidentially, for a 12 month period, towards an agreement for lease and a lease. The heads of agreement did not fall within the class of agreement referred to in Sagacious, whereby parties could agree to be immediately bound by certain terms, in the expectation that they would enter into formal documentation at a later stage, which may contain varied or additional terms. In essence, as I understand Karellas’ case, they say that, when the terms of the heads of agreement are considered in the required detail, too much is left for further agreement between the parties to make the heads of agreement complete, and the determination of the matters left incomplete did not require purely mechanical steps, and could not be determined on any reasonable and objective basis, so that the Court could not determine the content of many terms that were contemplated by the document.

It will illuminate what follows for me to say that, if this is a case where the parties formed the first of the intentions referred to by Giles JA in Sagacious, it is a relatively extreme example of that approach to forming contracts. After the heads of agreement was signed, the parties set about settling the formal documentation efficiently in a spirit of cooperation, but also negotiated, and generally agreed in principle, many significant variations and additions to the terms contemplated by the heads of agreement. They spent considerable time, effort and money, and probably changed their respective positions significantly. The events that have given rise to the repudiation claim occurred when the parties appear to have been close to entering into an agreement containing terms that were materially different to those contemplated by the heads of agreement. But they had not finally bound themselves to proceed on the new basis. Reversion by the parties to the original terms would not have been a simple exercise.

The heads of agreement was carefully negotiated by experienced and sophisticated commercial people, who felt able to negotiate the terms by direct negotiation on their own behalves, without the immediate assistance of legal advisers. All of the persons who participated in the drafting process can be taken to have known what they meant, and to have intended that the heads of agreement would be effective in accordance with its terms.

The parties started in the chapeau by referring to “this binding offer to enter into an Agreement for Lease and Lease with our organisation for the above mentioned new supermarket premises, on the following terms and conditions… (emphasis added)”

Clause 24 is a clear statement that the parties intended to execute a formal agreement “based on the Karellas Group standard documentation, including the commercial terms in this letter”. The clause is headed “Binding Agreement”, and states: “acceptance … will create a binding heads of agreement”. This seems to be a description of the first alternative described by Giles JA in Sagacious, which is set out above.

Karellas rely upon the fact that clause 24 uses the expression “heads of agreement”, rather than “agreement” to suggest that the parties did not have an immediate intention to be bound. However, the immediate context in which the expression was used, which contains an express statement to the contrary, undermines that argument.

The Court in these circumstances should hesitate to find that the parties did not achieve what they plainly stated they intended to achieve; that being an immediately binding agreement. It is true that, in some cases, even clear words by the parties of the nature contained in the heads of agreement may fail to achieve a concluded and binding agreement, but the Court should be wary of finding that to be so, except in a clear case.

The conclusion that the heads of agreement was intended by the parties to be final and binding is also supported by the wording of clauses 21 and 22. The former provision specifically gave Karellas a right to “withdraw from the project and claim for costs and loss of profits” if Finger, among other things, “fails to perform in accordance with the agreements and approvals”. Karellas would not need an explicit right to withdraw, and would have no entitlement to make the claim referred to, if it were not intended that the heads of agreement would be a binding contract.

Clause 22 provides “If formal documentation is not executed within [12 months from the date of this letter], Karellas Group can elect to terminate the agreement and withdraw from the project”. Again, if the heads of agreement were not intended to be binding, this provision would be unnecessary. A party does not need a right to terminate an agreement if the agreement is not binding.

The parties therefore did not intend that the heads of agreement would be a mere agreement to agree. Notwithstanding that intention, the parties clearly left many matters for further consideration and final agreement. The question is whether, contrary to the parties’ intention, the heads of agreement thereby became unenforceable as a concluded contract.

As noted above in the analysis of Finger’s statement of claim, it alleges in par 10 that the parties were subject to implied obligations to act reasonably to do the following within 12 months of the date of the letter; being to settle the terms of formal documentation for an agreement for lease, embodying the terms and conditions set out in the contract (with such variations or further terms as the parties might subsequently agree on); and to execute the formal documentation.

Karellas dispute that it is proper to imply the term alleged by Finger, essentially on the ground that, even though clause 24 states that “it is intended that a formal agreement for lease will be executed”, there can be no implied obligation on the parties to work out the terms of the agreement for lease and the lease, by acting reasonably, because there is no objective standard or framework for determining what terms would be reasonable in the circumstances.

Clause 24 of the heads of agreement states that the “formal agreement for lease will be executed based on the Karellas Group standard documentation, including the commercial terms in this letter”. I will for the present assume that the standard documentation existed, and was sufficient to provide an adequate basis for the initial draft terms of the agreement for lease and the lease, onto which were to be grafted the commercial terms in the heads of agreement.

The inclusion of the words “it is intended that a formal agreement for lease will be executed” (which also contemplates finalisation of the terms of the lease, which would become a schedule to the agreement for lease) demonstrates that the parties had an express intention that formal documentation would be executed. For that express intention to be brought to fruition, it would be necessary for the parties to take the steps required to settle the terms of the formal documentation, and to execute the engrossed documents. This is a case where, subject to the qualification discussed below, the heads of agreement contained an implied term of the type referred to by Macfarlan J in Perini Corporation v The Commonwealth [1969] 2 NSWR 530 at 545, whereby the parties were “bound to do all cooperative acts necessary to bring about the contractual result”. His Honour relied upon the following statement of Lord Blackburn in Mackay v Dick [1881] 6 App Cas 251 at 263:

The qualification arises because, even though it seems appropriate to imply a term of this nature into the heads of agreement, a duty of cooperation, even if requiring the parties to act reasonably, may not be effective to lead to the settlement of formal documentation, that complies with the intentions expressed in the heads of agreement. The existence of the aspects of the heads of agreement that require further agreement or determination by the parties, may not be capable of resolution by the parties cooperating reasonably to settle the terms of the agreement for lease. There may be disagreement, and no way for the Court to determine the relevant terms, because of the absence of an objective basis for identifying any particular reasonable outcome.

As the Court of Appeal said in Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 124:

See also Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 at [85] (Macfarlan JA).

As a practical matter, it is necessary to start from the point where the parties executed the heads of agreement, in circumstances that show that they intended to be bound immediately to settle the terms of a formal agreement for lease, but they appear to have left various matters for future agreement or determination. The Court’s endeavour to uphold the parties’ agreement will lead the Court provisionally to imply a Mackay v Dick type term, but that course may miscarry if, upon examination of all or any number of the matters left undetermined, there is simply too great a field of uncertainty or incompleteness for the heads of agreement to be enforceable at all.

It is therefore not sufficient to enquire, as suggested by Finger, whether there was an overarching implied term in the heads of agreement that obliged the parties to act reasonably in settling the terms of the formal documentation. It is necessary to examine each matter left for further agreement or determination, and to suspend judgment as to whether the implication of a duty to cooperate could lead to the settlement of those terms, until it is confirmed that the performance of the duty of co-operation is enforceable in the light of the nature and degree of the uncertainty or incompleteness of each of the matters.

Aspects of the heads of agreement did give rise to the need for the parties to agree upon some outstanding matters. Clause 11 refers to the issue by Karellas of a design brief. Clause 12 requires Finger to provide a development program acceptable to Karellas. Clause 14 requires a schedule of finishes, a scope of works, and Finger’s drawing transmittal schedule to be included in the agreement for lease, all of which are to be satisfactory to Karellas. Karellas required a number of covenants to ensure that the premises standards are maintained as stated in clause 17. Clause 19 requires the locations, dimensions and design of the external signage to be shown on the site plan. Clause 22 makes the heads of agreement subject to finalisation of development plans, programming, scope of works specification and finishes to Karellas’ satisfaction.

The heads of agreement contemplated that the parties would agree to a number of matters necessary for the reconstruction of the Property to create the supermarket, and in this respect it had much in common with a building or development contract. All of the terms referred to in the previous paragraph are of this character, except for clause 17. Clause 17 was directed at the covenants to be included in the lease. In this respect the heads of agreement focused on the potential relationship of landlord and tenant. The different considerations that apply in these two separate contexts make it convenient to deal with Karellas’ arguments based upon clause 17 after its arguments based upon the other clauses have been considered.

Three general observations warrant consideration at this point. First, a particular matter left by the heads of agreement for future agreement or determination may be of a nature that leads to the entire heads of agreement being unenforceable. That will only be so if the matter is of such importance that the unenforceable term is not severable from the balance of the heads of agreement.

Secondly, if a particular matter is not so uncertain or incomplete that it leads to invalidity of the heads of agreement as a whole, it may be a matter that is capable of being resolved by the parties’ reasonable cooperation. As the ultimate question is whether Karellas repudiated the contract on 9 June 2010, all that is necessary is that there be a valid contract on foot on that date. It is not necessary that by that time the parties have effectively addressed all of the matters left unresolved by the heads of agreement, and finally resolved those matters.

Finally, there is, so to speak, a sting in the tail of Finger’s success on its argument that the parties were under a duty, at least provisionally, to cooperate reasonably to settle the terms of the formal documentation. Finger’s argument, and its pleaded case, is that the parties had to cooperate reasonably to settle the terms of the formal documentation “embodying the terms and conditions set out in the contract (with such variations or further terms as the parties might subsequently agree on)”. There would be one level of complexity in determining what reasonable cooperation required, if all that the parties attempted to do was to settle formal documentation as contemplated by the heads of agreement. There may be a substantially greater level of complexity, if it is accepted that, as occurred in the present case, the parties might negotiate varied or additional terms. Plainly, the duty to cooperate could not apply to the negotiation of varied or additional terms (and I do not understand Finger to have submitted otherwise). However, if the touchstone of the duty is reasonableness, the question may arise as to what conduct reasonableness requires once the parties have in fact negotiated varied or additional terms, and acted on the basis, and incurred costs, in the expectation that the formal documentation will include the varied and additional terms. Finger’s case is that at 9 June 2010, at the time of the alleged repudiation, because the parties were not bound to go through with the varied and additional terms that had been agreed in principle, Finger could simply require Karellas to go back to the original position as at 21 December 2009, and settle and execute formal documentation solely on the terms contemplated by the heads of agreement. Determining what reasonable cooperation required in that context may be a very complex exercise.

I will now consider Karellas’ arguments concerning the unenforceability of the heads of agreement, that are based upon the terms that concern the reconstruction of the Property to create the supermarket.

The first specific ground pleaded by Karellas, in par 1(a) of their defence, is that the heads of agreement was no more than an agreement to enter into an agreement for lease because, under clause 1, “Karellas Group reserves the right to amend this offer” in the event of “further amendments, redesigns or changes to configuration” of Revision C.

If the wording of clause 1 is given its ordinary meaning, it does not take the form of a present obligation that is susceptible of being unenforceable, because it is uncertain or incomplete. The wording appears more to take the form of a condition subsequent, which would be triggered if the event occurred. If in fact there were no amendments, redesigns or changes to configuration, then the occasion for Karellas to amend its offer would not arise. Clause 1 is capable of being part of a final and binding heads of agreement, because if Finger did not cause the relevant event to occur, all of the other provisions of the heads of agreement would take effect in accordance with their terms. The terms of clause 1 do not, in my opinion, have the effect of making the heads of agreement unenforceable from its inception.

On the other hand, taking clause 1 at face value, if the event did occur, the provision appears to give Karellas Group an unqualified right to "amend this offer". I can see no basis for implying any term requiring Karellas to act reasonably in relation to how it might amend its offer, including as to whether it should withdraw. Any term that was implied would have to operate effectively irrespective of the nature and significance of the “event”, and the effects the “event” might have on the commercial viability of the supermarket.

If that is the correct construction of clause 1, the happening of the “event” would give Karellas an entitlement to withdraw from the contract on its own terms as it wished.

I take Karellas’ pleading of its reliance on clause 1 in par 1(a) of its defence as having the effect that the heads of agreement did not constitute a concluded and legally binding contract, as being wide enough to extend to the argument that, by the time of the alleged repudiation of the contract, there was no binding agreement, even if, contrary to Karellas’ primary submission, the heads of agreement was initially binding.

I have made this observation at this point because arguably the “event” did occur. That is at least so in relation to the changes to Revision C made in Finger’s s 96 application, which did not become finally effective until the Council approved the application on 12 May 2010. The consideration of this subject should be deferred until after the events that occurred after 21 December 2009 have been considered.

Karellas argue that the heads of agreement was no more than an agreement to enter into an agreement for lease, because significant terms were not agreed.

The first provision relied upon by Karellas in support of this argument is clause 12. That provision required Finger to provide a development program acceptable to Karellas Group. The development program referred to is a program that covers the expected time line for the implementation of all of the steps necessary to reconstruct the Property and construct the supermarket. The preparation of a development program is undertaken in many development projects. The preparation of the program depends upon the determination of the most efficient, timely and inexpensive staging of all of the steps necessary to achieve completion of the relevant project. The preparation of such a program ordinarily involves a level of expertise. There may in individual cases be scope for difference of opinion as to what program is most appropriate, but it is likely that differences of opinion will be of a technical nature, and fall within relatively narrow parameters. Clause 12 requires Finger to provide such a program to Karellas. The only scope for uncertainty arises out of the need for Karellas to be satisfied with the program.

The following extract from Carter on Contract at [05-060] is a correct summary, for present purposes, of the legal principles that apply where a contract is subject to a contingency that requires the satisfaction or approval of one of the parties (citations omitted):

The better view in this case is that clause 12 is subject to an implication that Karellas’ decision as to whether the development program provided to it by Finger was acceptable would have to be made on reasonable grounds. The adequacy of a particular development program is likely to be a technical matter that is capable of being determined objectively. However, no evidence was presented on this issue. It is an example of the question of uncertainty and incompleteness being dealt with by the parties at a high level of generality. Even if the view I prefer is wrong, Karellas would be subject to an implied obligation to act honestly in deciding whether the development program was acceptable to it. There is evidence that appears to suggest that Finger and Karellas actually agreed to an initial development program, as part of their agreement concerning the scope of works. However, the parties had not revisited the matter after the Council dealt with a number of s 96 applications lodged by the parties, before 9 June 2010. Accordingly, Finger’s obligation to provide a development program to Karellas in accordance with clause 12 remained executory. If the heads of agreement was otherwise enforceable, it was not unenforceable by reason of the inclusion of clause 12, as that term remained to be completed, and Karellas were at least under an obligation to act honestly in considering whether the development program was acceptable. In the absence of persuasive evidence to the contrary, I would infer that there would be some version of the development program that was suitable to Finger, which Karellas could not honestly reject. Clause 12 might simply have the effect of requiring a number of iterations of the development program, before an acceptable one was produced.

Karellas then argue that there were significant terms that had not been agreed because the parties had not agreed “the development works which [Finger] would carry out under clause 15”.

Finger countered this argument by submitting that, on its proper construction, clause 15 did not impose any obligation upon Finger at all.

In its initial draft form the heads of agreement required that, if Finger proposed further development, it was to be shown on a master plan, which was approved by Karellas, and included in the documentation. That obligation was removed from the heads of agreement. The heads of agreement provide in clause 15, that Karellas understood that Finger had the right to develop the property in a predetermined, orderly manner. Any such works were to be “in accordance with Karellas Group trading requirements”. Clause 15 then provides: “It is essential for Karellas Group to understand the proposed development direction of this property for the future”.

Clause 15 therefore provides that it is essential for Karellas Group to understand the proposed development direction of the Property, in relation to the right of Finger to develop the Property. The development direction referred to concerns subsequent development of the Property, after the reconstruction work contemplated by the heads of agreement, and the construction of the supermarket to be leased to Karellas. Taken at its highest, all clause 15 requires is for Finger to provide information to Karellas that will enable them to understand the proposed development direction for the Property in the future. That is an inherently nebulous requirement, but it is capable of sufficient meaning to make clause 15 enforceable. Relatively little information might be required to satisfy the obligation.

Finger’s position in submissions was first, that clause 15 did not impose on Finger an obligation to produce or give to Karellas a master plan, and secondly, clause 15 did not impose an enforceable obligation on Finger to give Karellas any information relevant to Finger’s intentions to develop the Property (T 203). Finger submits that clause 15 “means what it says, and imposes no obligation on the lessor” (T 190). Finger supports this argument by observing that, if clause 15 were intended to impose an obligation on Finger, it did not specify how or when (T 201).

The first part of Finger’s submission is clearly correct. Finger was not obliged to complete and give to Karellas a master plan in respect of the future development of the Property. That result flows from the fact that the heads of agreement as executed did not include such a positive obligation (rather than from the fact that a positive obligation to that effect was originally included in drafts of the document, but then deleted by agreement).

I do not accept the second part of Finger’s submission. Meaning must be given to the part of clause 15 that reads: “It is essential for Karellas Group to understand the proposed development direction of this property for the future”, if that can be done by properly construing the heads of agreement. The use of the word “essential” plainly suggests that the wording was intended to have importance. It is readily understandable that a party in the position of Karellas would want to know how Finger intended to develop the Property in the future, even if it was not feasible to impose upon Finger the obligation to complete a master plan for the development before the time when the agreement for lease was expected to be executed.

It is not difficult to see why the word “essential” was retained in clause 15. Clause 1 makes it expressly clear that the offer “is based on the plans” constituted by Revision C. As I have concluded above, Finger could hold Karellas to the bargain, provided it did not depart from Revision C. If it did so, it risked the possibility that it would not succeed in obtaining Karellas’ agreement to continue, in circumstances where Karellas would be free to withdraw. Clause 1 would only have effect during the period between the signing of the heads of agreement and the execution of the agreement for lease. If Finger decided to depart from Revision C after the agreement for lease was executed, that might neutralise the benefit evidently intended to be conferred on Karellas, if Finger departed from Revision C during the period when the heads of agreement was in effect. That would be so unless the agreement for lease itself included a term with the same effect as clause 1 of the heads of agreement. The point is that the terms of clause 1 give rise to the need for the parties to address, in settling the terms of the agreement for lease, the question of how the benefit conferred on Karellas by clause 1 could be preserved in the face of the possibility that Finger may decide to depart from Revision C, after the parties entered into the agreement for lease. Accordingly, information about the proposed development direction for the Property would be important to Karellas.

I do not accept that the words used in clause 15 are so devoid of meaning, or specificity, that they are incapable of imposing an obligation on Finger. The words do not explicitly impose an obligation upon Finger to provide any information to Karellas. However, the information that the words state is essential for Karellas to know could only be known by Finger. There should be read into the words the implication that Finger was to supply Karellas with the information that was said to be essential for Karellas to know. Finger had an implied duty to cooperate to give Karellas the benefit intended by clause 15.

I respectfully accept the statement of principle made by Barwick CJ in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436 where the learned Chief Judge said:

There might be scope for argument about the amount of detail that Karellas were entitled to receive, but that would not make the requirement uncertain. It would probably be satisfied by some reasonably specific schematic plan or description as to the development that Finger wished to pursue.

The receipt of the information would not be useful to Karellas, unless it occurred before Karellas entered into the agreement for lease, and in time for Karellas to decide whether the proposed development departed from Revision C, and, even if not, to negotiate appropriate terms to protect Karellas, and ensure that the development would be in accordance with Karellas’ trading requirements.

Fourthly, Karellas argue that under clause 21, the plaintiff “must acknowledge that Karellas Group’s agreement to proceed is based on [Finger’s] commitment to the project and to [Finger’s] development programs”. The effect of Karellas’ argument based on clause 21 is unclear, with respect. It is not explained in the defence, and is not self-evident. It does not appear from the way in which the defence is pleaded how the acknowledgement by Finger that Karellas Group’s agreement to proceed is based upon Finger’s commitment to the project, and to Finger’s development programs is capable, by itself, of causing the legal consequence that the heads of agreement is unenforceable. I reject the argument.

Finally, Karellas rely on the provision in clause 22, whereby "the offer is subject to the finalisation of development plans, programming, Scope of Works, specification and finishes to Karellas Group satisfaction". This term started its existence as a provision of the initial letter of offer, but has been retained in the executed heads of agreement. The word “offer” in this context must be understood as if it said “agreement”. Clause 22 is in form a condition subsequent. Each of the steps required to be finalised is important to the reconstruction of the Property, to build the supermarket within the Premises intended to be leased to Karellas. The collective importance of these steps should not be underestimated. However, they are the sorts of steps that parties in the position of Finger and Karellas would regularly agree to implement, in the course of all manner of commercial agreements commonly entered into by parties on a day-to-day basis. They are steps that would ordinarily be expected to be satisfactorily completed by sensibly minded parties acting reasonably in their own, and their mutual, interests.

On the basis of the legal principles that I have discussed in my consideration of the effect of clause 12, I find that clause 22 imposed upon both parties an obligation to cooperate reasonably in relation to the preparation of the documents referred to. It would appear that most of the work would be required to be done by Finger, but it is likely that Karellas would also have to be involved. The better view in this case also is that Karellas would have to act reasonably in making the decision as to whether the final form of the documents was satisfactory. Even if it should be found that there was no objective basis for determining whether the rejection by Karellas of any of the documents was reasonable (their being no evidence on that subject), Karellas would still be subject to an implied duty to act honestly in deciding whether to reject any of the documents. Following the approval of the s 96 applications, Finger had not submitted final versions of the documents required to Karellas before 9 June 2010. At that time Karellas had not been required to indicate whether it was satisfied with the documents submitted by Finger. It is probable that Finger could have prepared versions of the documents that could not reasonably, or alternatively honestly, be rejected by Karellas (as the case may be). The heads of agreement was not unenforceable by reason of the existence of clause 22 and the circumstances that the required documents had not been accepted by Karellas by the date of the alleged repudiation.

Clause 17 deals with the inclusion of covenants in the lease to ensure the maintenance of the Premises at an appropriate standard.

The relevant wording in clause 17 is:

In requiring a number of covenants to be included in the lease to ensure that the stated purpose is achieved, in relation to a number of subjects identified inclusively, clause 17 gives scope for argument that it is in legal effect no more than an agreement to agree on the additional covenants, or alternatively an agreement to negotiate.

I have had regard generally to the reasons for judgment of Allsop P (with whom Ipp and Macfarlan JJA agreed) on the subject of agreements to negotiate in United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618. His Honour’s observations on the subject are too extensive to set out in these reasons for judgment. His Honour held at [50] “that uncertainty and incompleteness [are] different concepts”. He further noted at [56] that “an agreement to agree is incomplete, lacking essential terms… (That is not a question of uncertainty or vagueness, but the absence of essential terms.)”

In the present case the heads of agreement is not in whole a mere agreement to agree. It is an agreement that, as I have found, is capable of creating binding contractual obligations, subject to the effect of clause 17. It may be that the parties left it open that Karellas could require that additional covenants be included in the lease, and that may require further negotiations between the parties. Even if clause 17 is unenforceable, that would only have the effect that the heads of agreement as a whole was incomplete, if the covenants contemplated by clause 17 were essential to the operation of the heads of agreement.

Clause 17 does not contain any express obligation to negotiate in good faith. In this context there would be little purpose in the Court implying such an obligation, as the parties would remain free to negotiate in their own interests. There is no objective reason to believe that the implication of such an obligation would be likely to lead the parties to any agreement at all; let alone any particular agreement.

Finger’s response to the presence of clause 17 is that the wording in clause 17: Karellas Group requires a number of covenants…” gave Karellas the right to impose the covenants on Finger, subject to two constraints. The first is found in clause 24, which states that the formal agreement for lease “will be executed based on the Karellas Group standard documentation”. The second is that any covenants sought to be imposed must fit the description in clause 17, being that they were “not intended to impose onerous conditions on the Landlord, but are necessary to ensure that the Karellas Group supermarket trades to its optimum level”.

I do not accept that the expression “requires a number of covenants” has the meaning that Karellas could unilaterally impose covenants on Finger, even if subject to constraints. A requirement that the final form of the lease include covenants of a particular type still leaves open the need for the parties to agree the terms of the covenants. It would be very unusual for an intending landlord to cede to the tenant the right to impose covenants on the landlord. That would be quite contrary to common commercial practice. If it were intended that Karellas would have that right, it would be expected that the parties would have clearly conferred that right on Karellas by the wording used.

I also do not accept that the second of the two constraints suggested by Finger is, by itself, sufficiently certain to be effective and enforceable. There is no objective basis for measuring the onerousness of covenants, or to decide the dividing line between permissible and impermissible covenants. Furthermore, there is at the least a tension between the concept of covenants not being onerous, yet being necessary to ensure that the supermarket trades to its optimum level.

However, that part of clause 24 that states “a formal agreement for lease will be executed based on the Karellas Group standard documentation, including the commercial terms in this letter”, may be capable of sustaining the enforceability of the heads of agreement, in the absence of the further agreement of the parties as to the inclusion of additional covenants in the lease, as contemplated by clause 17.

As the wording of clause 24 expressly identifies Karellas’ standard documentation as the basis for the agreement for lease, the Court may have regard to that documentation by force of the contract itself, and not simply as part of the background.

As I have noted above, on 29 October 2009 Karellas’ solicitor, Mr Toole, delivered to Finger a draft agreement for lease, and the draft lease. That gives rise to a question as to whether the evidence demonstrates that those draft documents were in the terms of Karellas’ standard documentation.

As a related matter, it should be noted that clause 17 was included in the draft heads of agreement circulated before 29 October 2009, as well as in the final form of the document signed on 21 December 2009. The circulation of the draft agreement for lease and the draft lease intervened in the process of negotiating the heads of agreement. At the time the heads of agreement was signed the draft agreement for lease and the draft lease, as well as the circumstances in which they were given to Finger, were part of the background against which the parties signed the heads of agreement.

Accordingly, the reference to Karellas’ “standard documentation” in clause 17 may not just be a cross reference to a standard set of documents known to Karellas, but may be a reference to the specific draft documents that were before the parties for their consideration.

There is scope for argument as to the interplay between clause 17 and clause 24. By itself, clause 17 would appear to suggest that it was open for the parties to negotiate additional covenants at large, albeit subject to a number of somewhat indefinite restrictions. Clause 24 would suggest that the baseline for determining the covenants to be included in the lease was Karellas’ standard documentation, so that there would be an initial set of covenants for inclusion in the lease, leaving it to the parties to modify those covenants if they could agree to do so. There is in my view an element of ambiguity as to how the two terms were intended to operate together.

The principle that is to be applied to the construction of the relevant terms of the heads of agreement is as stated in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35] (French CJ and Hayne, Crennan and Kiefel JJ) (citations omitted):

See Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 310 ALR 113 at [71] and [73] – [85]; and Stratton Finance Pty Ltd v Webb [2014] FCAFC 110 at [40]. I am required to have regard to the background and the context in which the heads of agreement was executed, whether or not it contains any provisions that are ambiguous, or capable of bearing more than one meaning.

The background and context to which the Court may have regard in construing the contract is as stated by Allsop P (Giles and Macfarlan JJA agreeing) in QBE Ensure its Australia Ltd v Vasic [2010] NSWCA 166 at [35]:

The question is whether, when they signed the heads of agreement, the parties intended that the effect of clause 17 would be that they would set about the task of negotiating covenants of the type described in the clause at large, save for the effect of the somewhat contradictory generally expressed limitations that the covenants would at the one time not be onerous to Finger, but at the same time they would ensure that Karellas’ supermarket traded to its optimum level. Alternatively, did they objectively have in mind that Karellas’ standard documentation established the baseline for their negotiations, and contained covenants that dealt with the subject matter of clause 17 that would be sufficient to be included in the lease, unless the parties agreed to vary or add to those covenants in the course of further negotiations?

There was little focus in the argument of the parties as to the significance of the words “based on the Karellas Group standard documentation” in clause 24. In fact, it was Karellas’ solicitor that prepared the initial draft agreement to lease, and the lease, and (he had the primary carriage of revising the draft documents to accord with the ongoing negotiations between the parties. It is generally the case that the solicitor for the landlord prepares draft documents of this nature. There was no specific evidence as to whether Karellas had standard documentation, and that documentation was not proved. The evidence does establish that Karellas had for some time operated three other supermarkets, trading as IGA. Karellas and its solicitor appear to have proceeded upon the basis that the first draft agreement for lease and the lease were prepared starting from precedents that Karellas had used in other contexts.

The evidence justifies the conclusion that, on the probabilities, Mr Toole incorporated the terms of Karellas’ standard documentation in producing the first draft of the agreement for lease, and the lease.

The evidence goes further, however, than to support a finding that the draft documents circulated by Mr Toole on 29 October 2009 were effectively Karellas’ standard documentation, for the purposes of clause 24 of the heads of agreement. The draft documents had actually been prepared by Mr Toole on behalf of his clients, Karellas, and submitted to Finger, subject to instructions, but in the evident expectation that Karellas would be satisfied that the draft documents were to be the basis for any further negotiation of the final terms of the formal documentation. The reasonable business person looking at clause 17 and clause 24 of the heads of agreement on 21 December 2009 would know, as did the parties, that Karellas had already circulated substantially complete drafts of the formal documentation (though omitting most of the commercial terms that were included in the heads of agreement), and would understand the meaning of the clauses in that light.

There is a question as to whether it is permissible to have regard to any conduct of the parties, after the date when the heads of agreement was signed, in order to determine what the objective context and background was, as understood by the parties.

The majority of the High Court in Agricultural & Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [35] (Gummow, Hayne and Kiefel JJ) said that “it is not legitimate to use as an aid in construction of [a] contract anything which the parties said or did after it was made”. However, Campbell JA has suggested that there may still be circumstances where an event occurring after a contract was made could be used to prove a matter that is relevant to the construction of the contract. His Honour has given, as an example, the situation where, after the contract was made, one party admits the truth of some fact that is a relevant part of the context in which the contract was made. Campbell JA could see no reason why that admission could not be used as part of the means of proof of the background fact. See Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at [324]; and Centennial Coal Co Ltd v Xstrata Coal Pty Ltd [2009] NSWCA 341; (2009) 76 NSWLR 129 at [48]. Hargrave J accepted the validity of Campbell JA’s reasoning in Tatts Group Ltd v The State of Victoria [2014] VSC 302 at [78].

In principle, evidence of the type described by Campbell JA should be admissible, notwithstanding that it concerns the conduct of a party after the date of the contract. The purpose of the evidence being received is to prove a fact that existed at the date of the contract, where that fact is required to be taken into account for the purpose of construing the contract. The evidence will not be used directly to assist in the construction of the contract.

There is one aspect of the conduct of the parties after the date of the heads of agreement, that supports the conclusion that, at the time they signed the document, they had in mind the fact that the draft documents prepared by Mr Toole were the starting point for the settlement of the final terms of the formal documentation. The parties acted as if, as at 21 December 2009, they understood that Mr Toole’s draft documents were to be the starting point, and that clause 17 and clause 24 were meant to take effect in that light. On 28 January 2010 Harold Finger wrote an email to Andrew Karellas, following a discussion with Finger’s solicitor, in which Mr Finger made some 24 suggestions concerning amendments to the draft agreement for lease circulated by Mr Toole. While the suggested amendments were not inconsequential, they do not appear to be highly controversial. It is at least clear that from this point, and afterwards, that the parties negotiated on the basis that the terms of the draft documents formed the basis of the agreement between the parties, subject to any variations that may be agreed.

I have acted upon this subsequent conduct of the parties only for the purpose of reinforcing the finding that I have made, in any event, that the parties accepted the draft documents that were in existence at the date of the heads of agreement as being the starting point for settling the formal documentation. They did not act upon clause 17 as if it had the width that its words were capable of meaning. They did not embark upon a process of attempting to agree upon the wording of any significant number of new covenants proposed by Karellas that dealt with the subjects identified in clause 17.

It will therefore be necessary to analyse the relationship between clause 17 and the terms of the draft lease that was circulated on 29 October 2009. To the extent that Karellas’ standard documentation contained covenants that dealt with the protections that are the subject of clause 17, then there would be a pre-existing set of covenants contemplated by the heads of agreement that could be included in the lease, if the parties were not able to agree upon a different set of covenants. The need for the parties to pursue agreement on the wording of the covenants at large would not arise, although they could depart from the existing covenants if they were able to agree to do so.

I have set out relevant terms in the draft lease above, in the context of the negotiation of the heads of agreement. The draft lease contained a covenant for quiet enjoyment. By clauses 3.50 and 3.51.1.1.1, the draft lease would have permitted Finger to make alterations to the Building, but not to the Premises, and to enter upon the Premises for that purpose. Finger would have been liable to pay reasonable compensation for any interruption to the business conducted by Karellas on the Premises. It may be that these terms would, on the one hand, have given Finger more restricted rights to conduct the further development of the Property than it subsequently negotiated in principle with Karellas, and on the other hand, would have given Karellas less ample protection than was subsequently negotiated. However, the draft lease contained covenants that both permitted alterations by the landlord to the Building, and gave protection to the tenant.

Clauses 3.112 to 3.115 of the draft lease contained provisions that provided for the strata titling of the Property, which was another subject dealt with by clause 17.

The draft lease did not contain any separate covenant by the landlord concerning car parking. However, clause 18 of the heads of agreement itself provided for the dedication and use of 16 parking spaces to be managed by Karellas. Those parking spaces were expressly required to be made available, irrespective of the future development of the Property. The specific requirements of clause 18 appear to be adequate to protect Karellas on the issue of car parking, even if the draft lease did not initially contain a covenant by the landlord that gave the tenant those rights. That is because clause 18 would separately require the inclusion of the necessary covenant concerning car parking, irrespective of the unenforceability of any part of clause 17.

The draft lease also does not appear to contain a covenant dealing with “management standards”, as referred to in clause 17. It must be remembered, however, that the Property was not intended to be a shopping centre, with many separate businesses operating from different leased premises within the Property, which would ordinarily require a complex management agreement. The supermarket was going to be the only business that operated from the Property. It is therefore not clear that any separate covenant concerning the management of the Property was necessary. (In any event there was a term, in clause 3.23, that obliged the landlord at its cost to use reasonable endeavours to ensure that defined Facilities and Services were functional during the operation of the supermarket).

There is no term in the draft lease dealing with “the preservation of the arrangements shown on the site plan referred to below”, as stated in clause 17. However, the part of the draft clause 17 that provided for the site plan was deleted from the final form of the heads of agreement. With that deletion the part of clause 17 that required a covenant concerning the preservation of the arrangements on the site plan became ineffective.

The congruence between the draft lease and the requirements of clause 17 is clearly incomplete. However, for the reasons that I will now give, that does not have the effect that clause 17 introduced uncertainty, or incompleteness, into the heads of agreement, that had the effect that it is not enforceable.

Finger has the burden of proving that the heads of agreement was enforceable as at the date of its execution, and at the date Finger claims to have terminated it for repudiation by Karellas.

That means that Finger must show that, if the parties had abandoned their attempt to negotiate varied or additional terms to those contained in the heads of agreement and they had reverted to settling the terms of the agreement for lease and the lease in accordance with the heads of agreement that document was sufficiently certain to permit that exercise to be carried out in a manner that was contractually enforceable.

That is a conceptually difficult question to address, because it arises hypothetically in the context where the question is whether there was a valid and enforceable contract between the parties at the date of the alleged repudiation, rather than in proceedings where the Court is called upon to determine, on the basis of proper evidence, whether one or more of the covenants contemplated by clause 17 simply cannot be ascertained with adequate certainty in any objective manner, and whether the importance of that term is so great that clause 17, or the relevant part of it, cannot be severed from the balance of the heads of agreement.

It must be acknowledged that there are competing and inconsistent considerations, that weigh for and against a finding that clause 17 was, in the circumstances of the heads of agreement, sufficiently complete to be enforceable. The starting point is, as I have found, that the parties clearly intended to be bound by the heads of agreement at the time when they signed it. That justifies the Court in being studious to construe the words of the heads of agreement, in its context and background, and having regard to its commercial purpose, in a manner calculated to find certainty and completeness, rather than the contrary. For the reasons that I have explained above, when properly understood, the enforceability of the heads of agreement can withstand the various practical matters that the parties left open for subsequent determination or agreement. The heads of agreement was capable of being complete and enforceable from its inception, notwithstanding that its enforceability was contingent in various ways. The parties included clause 17, concerning the inclusion of covenants in the lease intended to protect Karellas in a number of important circumstances. The wording of clause 17 creates the appearance that there remained a need for the parties to negotiate covenants at large, subject to a number of nebulous, and possibly inconsistent, constraints. Viewed in isolation, clause 17 militates against a finding of certainty and enforceability. However, not only did the parties agree in clause 24 that the formal documentation was to be based upon Karellas’ standard documentation, but that documentation was made the basis of a relatively complete draft agreement for lease, and lease. The drafts principally required the insertion of the commercial terms that were contained in the heads of agreement. Yet it cannot quite be said that, when they signed the heads of agreement, the parties intended objectively finally to be bound by the terms in the draft documentation, unless they agreed to vary those terms. The draft documentation was, rather, an immediate part of the context or background, in which, instead of the parties basing their negotiations on whatever happened to be Karellas’ standard documentation, and negotiating anew the covenants contemplated by clause 17, they had already before them draft documentation that contained terms capable of being the final terms (subject to necessary completion as to detail), but not actually being the agreed final terms.

In respect of the covenants contemplated by clause 17 of the heads of agreement, it must be acknowledged that the parties had not by 21 December 2009 finally agreed those covenants. What they had done was to sign the heads of agreement in the context that there were existing draft documents, which satisfied the description of being based upon Karellas’ standard documentation, and which largely but not completely covered the subjects identified in clause 17. It would be wrong to equate these circumstances with the situation that the parties had agreed sufficiently as to the covenants required by clause 17 to obviate the need for further negotiation.

The question is whether the heads of agreement was not final and binding because, although the draft documents provided a baseline for the covenants contemplated by clause 17, the parties intended to conduct future negotiations in order to agree the terms of those covenants.

Accepted contractual principle tends to encourage the drawing of a conclusion that any agreement to negotiate contractual terms in the future inexorably leads to incompleteness. At least where the gaps in the contractual fabric cannot be ignored on the principles of severance, there is no concept of a small or inconsequential gap. The gap is likely to be a hole in the fabric through which the enforceability of the contract disappears.

The answer to the question in the present case must accommodate the following matters. First, as I have found, the parties clearly intended to be bound immediately when they executed the heads of agreement. Secondly, they agreed the essential terms of the lease, as to premises, commencement, term and rent. Thirdly, they agreed most of the other important terms, or a mechanism for determining those terms. Fourthly, they clearly contemplated spending considerable time, effort and money in implementing the agreement (and did so). Fifthly, the effect of the agreement was to stultify Finger’s property for a period of up to one year while the negotiations took place. Finally, while the parties agreed to negotiate the covenants required by clause 17 (starting from the draft documents as a baseline), clause 22 gave the parties a right to withdraw if the documentation was not executed within a year.

On the other hand, it must be accepted that the inclusion in the lease of adequate covenants on the subjects contemplated by clause 17 was important for the protection of Karellas’ interests.

I have concluded that the heads of agreement was a valid and enforceable contract from the date of its execution, for two reasons.

First, I am not satisfied that the Court could not have determined the terms of the covenants required to satisfy clause 17 if it had been required to do so. That is not an exercise that the present dispute required the Court to undertake. The parties negotiated a number of covenants in principle by June 2010, but both parties accepted that they were not bound to proceed on the basis of those terms. The parties negotiated variations and additions to the terms contemplated by the heads of agreement.

While clause 17 did not give Karellas the right to impose terms on Finger, Karellas had the right to request terms. The starting point was the covenants in the draft lease, which included the covenant for quiet enjoyment. The terms had to have the purpose identified in clause 17. The terms were not to be onerous. The parties were required to cooperate reasonably.

Contracts should not be more prone to findings of incompleteness in proportion to increasing generality of the assertion that they are mere agreements to agree. There was no investigation in this case of what would actually have been involved in the Court’s determining the terms of any covenant required by clause 17 in circumstances where the parties could not themselves agree.

I am not satisfied that it has been established that clause 17 is too uncertain or incomplete for the heads of agreement as a whole to be unenforceable. Although the ultimate burden of proving enforceability falls on Finger, an evidentiary burden falls on Karellas, in respect of their claim that clause 17 alone is fatal to the enforceability of the heads of agreement. That burden has not been carried.

My second reason for holding that the heads of agreement was enforceable applies even if the Court would not have been able to determine the covenants required by clause 17 in the absence of agreement by the parties.

The heads of agreement had the attributes I have identified above, when considering the matters that must be taken into account in determining its enforceability. The parties left open the negotiation of the covenants required by clause 17, but impliedly agreed to conduct negotiations. They gave themselves 12 months to agree to the covenants, after which, clause 22 gave each party a right to withdraw.

I can see no reason why the law of contract should have the result, in these circumstances, that the heads of agreement was void from its inception.

The present case is but a particular species of the type of contract that was described by Giles JA in Sagacious, where the parties agree to be bound immediately by existing terms but contemplate that variations or additions may be included in the formal documentation. Here the parties identified the additional terms, agreed to negotiate towards their agreement, and agreed that the contract could be terminated if that agreement was not achieved within a fixed period.

There is a significant amount of evidence concerning the steps that the parties took, after the heads of agreement was signed, to implement its requirements. It will be necessary, for the sake of reasonable economy of exposition, briefly to consider the events that are significant.

I will deal with the steps that the parties took by subject matter, rather than chronologically, as that should make the significance of the evidence clearer than would be the case if the events were considered in chronological order. I will deal first with the settlement of the wording of the draft agreement for lease, and then the lease. Next I will deal with the steps that the parties took to agree various documents, such as scope of works, and a development brief, that were required to be made schedules to the final form of the agreement for lease. I will consider the applications that were made to the Council to vary the original development approval. Following that, I will look at the issue of how the parties attempted to deal with the consequences of those variations, and the position that the parties had reached by the time of the alleged repudiation. The point of significance will be whether in reality the parties had reached practical finality before the alleged repudiation. It is in this context that I will deal with the negotiation by the parties of the term of the lease that was to protect Karellas in the event of the future further development of the Property.

As I have noted above, Karellas’ solicitor provided a draft agreement for lease to Finger’s solicitor on 29 October 2009, relatively early in the process of negotiating the terms of the heads of agreement.

After the heads of agreement was executed, the parties went about the task of settling the terms of the agreement for lease in a conventional way, by suggesting, and responding to suggestions for, amendments to the current draft. It is not necessary to track through the drafting process.

As I understand the evidence, that process culminated in an email from Karellas’ solicitor to the solicitor for Finger on 12 April 2010, that attached a revised draft of the agreement for lease in mark up, together with a clean copy. The document was expressed to be a deed of agreement for construction and lease for supermarket between Finger and Karellas Investments. A number of terms of the draft document appear to have particular significance, in view of various terms of the heads of agreement.

“Plan” was defined in clause 1.1 as meaning Revision C, which was to be annexed to the agreement as the sixth schedule (which itself was called “plan of premises”).

“Premises” was defined in clause 1.1 to mean the premises described in the Lease and as shown on the Plan. Under clause 2.1, Karellas Investments agreed to take a lease of the Premises based upon the Plans and Specifications.

“Plans and Specifications” was defined in clause 1.1 as meaning the plans and specifications “to be prepared by the Landlord for the purposes of construction of the Landlord’s Works and signed by an authorised officer of each party for the purposes of identification”. The better view of the meaning of this term is that the plans and specifications should exist at the time of the execution of the agreement, and at that time be signed for the purposes of identification.

The draft agreement for lease contained the following provision in clause 2 concerning the Premises:

The proposed clause 2.2 is a departure from clause 1 of the heads of agreement in so far as, for the time being, it included the 22 m² reserved area in the demised premises.

The effect of clause 2.2 would be that Finger could only excise the 22 m² from the premises after a period of 3 years from the commencement date of the lease. To the extent that Finger needed that area for access to the second floor, Finger would be prevented from carrying out any development on the second floor that required that access for a period of 3 years.

The heads of agreement did not contemplate that a mezzanine floor would be constructed in the back office area of the demised premises. Proposed clauses 2.4 and 2.5 were therefore also departures from the terms of the heads of agreement.

The heads of agreement in clause 11 imposed an obligation on Finger “to deliver a turn-key supermarket premises in accordance with the obligations contained in the Specification”. (It also required that the Specification would be attached to the agreement for lease, so that was a document that the parties were required to agree to). That meant that Finger had to do all the work and pay the cost of that work.

Clause 1.1 of the proposed agreement for lease contained definitions of “Landlord’s Works”, being the works described in the second schedule to be completed by Finger, and also “Tenant’s Works” being also works described in the second schedule, to be completed by Karellas Investments.

Under clause 4.7 Karellas Investments agreed to contribute to the costs of the Landlord’s Work, as referred to in the Scope of Works, which was to be in the second schedule. There was a complementary obligation on Finger in clause 10.5 to contribute to the works to be undertaken by Karellas Investments, as referred to in the same scope of works.

In their negotiations the parties departed from the requirements of clause 11 of the heads of agreement, in that the scope of works document would require part of the works to be implemented by each of the parties, and for each of the parties to bear identified costs of the works to be implemented by the other. Karellas agreed to bear the cost of (among other things) walls and ceilings of the cool rooms; distribution boards, sub-mains and in-store cabling; 50% of air conditioning design, development, equipment, condensers, exhaust hoods, ducting, systems and controls; 50% drainage and structural costs of refrigeration; shop fitting and refrigeration cabinets and cool rooms; protection of internal columns and walls on trading floor; cool room; and food preparation areas.

Clause 14 of the heads of agreement expressly provided that “documents covering Schedule of Finishes and Scope of Works, together with an appropriate Landlord’s Drawing Transmittal schedule, all satisfactory to Karellas Group, will be required for inclusion in the Agreement for Lease”.

The first schedule, which was blank in the draft, required the parties to agree to a development program and incorporate it as a schedule. As mentioned, the second schedule required the parties to agree a scope of works. The third schedule was to be the relevant development approval. The fourth schedule was to be the Karellas Group Design Brief. The fifth schedule was to be the terms of the lease. The sixth schedule was to be the plan of the premises.

After the parties executed the heads of agreement, they commenced the process of settling the terms of the formal lease in a conventional way, by considering suggested amendments made by each party, and a number of iterations of the draft lease. It is not necessary to consider the evolution of the draft lease in detail.

The various versions of the draft lease contained a provision in the terms of clause 14.12 of the 29 October 2009 draft lease (concerning the entitlement of Finger to make alterations to the Building) until about 24 April 2010, when the parties appear to have started to give more direct attention to the terms that were appropriate in relation to any future development of the Property. Draft leases on that date and 10 May 2010 contained amended provisions dealing with that subject. Those drafts also contained terms requiring Finger to consult with Karellas on any proposed redevelopment, and to consider Karellas’ concerns regarding the amenity of the Premises.

Clause 25 would oblige Finger to dedicate no less than 16 car spaces to be used by customers of the Premises, as shown in the annexed Plans. The customer car parking would be managed by Karellas. Karellas may allow that the parking be used free of charge for a time determined by Karellas.

Clause 25(b) provided that the loading dock would be regulated for the use and convenience of the Premises, on such reasonable conditions as were agreed between Finger and Karellas from time to time.

Clause 25(d) would oblige Finger to maintain the exterior of the Building to a high standard.

Clause 7.4 would entitle Karellas to access and use the Premises 24 hours a day 7 days a week. Item 9 of the Commercial Terms Schedule provided that the operating hours of the business would be 7 AM to 10 PM Mondays to Saturday, and 8 AM to 10 PM Sundays.

By 20 May 2010, the draft lease contained a clause 13.10 governing alterations to the Property if Finger elected to excise the 22 m² reserved area, and to construct the mezzanine level in the back office area. Under this provision Finger had the right to excise the 22 m² on a date that was at least 3 years after the Commencement Date. During the period of disruption the rent would be reduced to 2% of the turnover of the business.

Clause 13.11 dealt with the right of Finger to make other alterations to the Property. Clause 13.12 contained conditions to apply in the event of such alterations being made, in order to provide protection to Karellas. Finger requested a new version of clause 13.11 on 24 May 2010, and Karellas responded on 1 June 2010 by suggesting an alternative version of a new clause 13.11. The parties continued to negotiate in relation to the terms of clause 13.11.

As of 3 June 2010, the version of clause 13.11 that the parties were considering was in the following terms:

This term, if included in the final form of the lease, could not confine Finger’s entitlement to alter the Property to making alterations that were consistent with Revision C. While in that way the entitlement was open-ended, Finger would not be entitled to enlarge, alter or reduce the Premises (as opposed to the Building other than the Premises) without Karellas’ consent.

Mutual emails between Ben Finger and Vasilli Karellas on 4 June 2010 introduce some small doubt about whether this was precisely the final draft of clause 13.11. The doubt concerns the relevance of the audited financial figures to the amount of the reduction in rent. This doubt is immaterial.

Vasilli Karellas’ response on 4 June 2010 was: “Ok, we’ll get [Mr Toole] to get the lease off to [Mr Reid]”.

Apart from clause 13.11, there were other relevant draft clauses (included in the 20 May 2010 draft lease). Clause 13.12 provided:

Clause 13.13 also contained a term that: “The Landlord must carry out any works referred to in sub-paragraphs of this clause 13.13 outside the trading hours of the Tenant unless agreed otherwise by the Tenant acting reasonably”. Those works included works that the Landlord needed to do upon the Premises in order to carry out the works contemplated by clause 13.11 and clause 13.12.

Clause 25(c) would oblige Finger to consult with Karellas first on any proposed redevelopment of the Land, and to consider Karellas’ concerns regarding the amenity of the Premises.

The termination of the heads of agreement intervened before any of these terms were incorporated into a final draft lease, and included as a schedule to an executed agreement for lease.

The last version of the draft agreement for lease that was produced on 12 April 2010 made provision for six schedules. Three of those schedules; the first schedule (the development program); the second schedule (landlord’s and tenant’s works); and the fourth schedule (Karellas Group design brief) required some amount of preparation and agreement between the parties. (The fifth schedule was to be the agreed draft lease, but I have dealt with that issue above).

The parties did not explore the preparation of the three schedules to the agreement for lease in detail in their submissions, but the evidence appears to establish that drafts of those documents were prepared to the satisfaction of the parties.

A draft development program was circulated between the parties on 13 January 2010.

A draft final version of the schedule of works was circulated on 13 January 2010. That document identified which works were to be done by each of Finger and Karellas.

A document that was apparently Karellas’ design brief (called “Building Requirements”) that was described as final, to be incorporated into the lease documents, was circulated on 15 January 2010.

All of these documents were prepared before Finger informed Karellas that it wanted to apply to the Council for approval to make various changes to the proposed building works. The effect of Finger obtaining the Council’s approval to make these changes was that the parties had to reconsider the documents. The evidence does not make the extent of the changes that may have been necessary clear.

As I have noted above, the original development approval does not appear to have allowed for the construction of a first floor slab over any part of the Property, and the approved drawings indicated that there would only be two structural columns within the proposed trading area.

Revision C provided for a Bondeck slab over the trading and back office areas, but the drawings do not indicate the placement of any structural columns within those areas.

On 10 February 2010, Karellas lodged a s 96 application signed on behalf of Finger. The purpose of the application is not entirely clear, but it appears to have sought approval for the layout of Karellas’ trading area and the back office, including a mezzanine floor as part of the back office. The Council’s approval was issued on 2 June 2010. The Council did not approve the application in so far as it sought approval to the use of trolleys by Karellas as part of the operation of the supermarket. Clause (1) (A2), which stated: “The construction of a new mezzanine level is not approved as part of this application” has been deleted by being struck through.

Finger tendered parts of an affidavit by Michael Briscas sworn 20 December 2012. Mr Briscas was, as I have noted above, a consultant retained by Karellas. Karellas did not read the affidavit on the hearing. Mr Briscas said that, on 11 March 2010, he received an email from the architect for the project manager, that foreshadowed the intention of Finger to file an additional s 96 application.

The email said that the s 96 submission was to resolve building construction related issues. The architect said that the original development approval “does not provide a building that will provide any future proofing”. Another observation was: “Given our constraints placed by council, we have been working hard to get the best result in relation to building height, underside of slab RL…” He referred to the height “from ground floor slab to underside of ceiling slab”.

On 12 March 2010, Harold Finger sent the plans for the proposed s 96 application to Vasilli Karellas.

The s 96 application is dated 17 March 2010. The description of the changes was: “1. Removal of existing roof & internal rear walls; 2. Construction of new roof; 3. Removal of existing internal mezzanine floor; 4. Repositioning of approved DA plant room”.

The Details of Application to Modify Development Consent dated 17 March 2010 prepared by Finger’s architect described the proposed external alterations (par 3.1) and internal alterations (par 3.2).

The s 96 application and the details provided by the architect do not appear specifically to mention a first floor slab above the ground floor.

The s 96 application was approved by the Council on 12 May 2010. The approved drawings do not in any obvious way allow for the construction of a first floor slab, and do not appear to have any notification to the effect that such a slab would be constructed. As I read the drawings, they do not identify the situation of structural columns to support any first floor slab.

The drawings contained notations concerning changes that were proposed, including the following: previously approved plant room to be removed from the roof over the car park and placed on a mezzanine structure in the car park; new roof structure replicating existing sawtooth design; new metal deck roof over the car park; and various other changes.

There is uncertainty in the evidence as to what the situation was in relation to the construction of a slab at first floor level. The parties did not address submissions to this issue in any detail. I have not detected a reference to the construction of the slab in the approved drawings. However, in the correspondence I have outlined above, it seems clear that there would be a first floor slab. I will also refer below to evidence that one of the issues that required consideration by the parties was the situation of structural columns.

In cross-examination, Ben Finger said that Finger told Karellas that it would future proof the site, and that it would need columns in various locations, and that there were discussions concerning the layouts of the columns, as well as where they would fit within Karellas’ gondolas (T 50, 51).

Although the position is unsatisfactory, I will proceed upon the basis that Finger did propose to construct a first floor slab, even though I have not been able to identify it, or to determine where any structural columns would be situated to support the slab. The interpretation of the drawings and the application and consent documents requires a level of expertise. In view of the positive references to the proposal to construct a slab, and the need to deal with the situation of the structural columns, it would be inappropriate for me to determine this issue on the basis of my inability to confirm these matters by my own review of the evidence.

Mr Briscas said that any future development of the Property that involved building work on top of the existing building could have impacts such as the following: hoardings on the street; difficulties in handling building materials, including loading and unloading trucks, and the use of cranes; interruption to traffic and customers; disruption to the 16 retail car spaces allocated to the supermarket; handling of noise, rubbish, dust and general construction debris; and impairment of signage by hoardings and scaffolding.

Mr Briscas made a list of issues that needed to be considered, and a meeting occurred on 25 March 2010 between representatives of the two parties. He prepared an email to record the points discussed. One of those points was: “11. The optimum structural grid to be confirmed to IGA (for columns) to resolve set out within gondolas”.

The evidence suggests that Mr Briscas, and his equivalent retained by Finger, Mr Vigdor, decided they should defer further detailed work until Finger’s s 96 application was dealt with by the Council.

A number of issues remained outstanding until it least 20 May 2010, as shown in the list of issues prepared by Mr Briscas, including the structural column layout, and any other structural impact on Karellas’ layout.

In an email from Mr Vigdor to Harold and Ben Finger dated 21 May 2010, Mr Vigdor responded to Mr Briscas’ concern about the structural column layout: “The structural columns layout and any other structural impact on the tenant’s floor layout will be reviewed, discussed and all efforts shall be exercised by the lessor so as to accommodate the tenant’s request”.

There is an assertion in an email written by Ben Finger to Vasilli Karellas on 2 June 2010 that “it also appears that we have resolved all of the building matters bought (sic) to our attention by Michael Briscas” save for two items identified by Mr finger concerning ceiling heights in the mezzanine and cool room area, and the splitting of costs associated with in ground piping. Apart from this assertion in correspondence, there is no evidence of a positive nature concerning the discussions necessary to resolve the issues identified by Mr Briscas, that arose out of the approval of Finger’s s 96 application.

There is no evidence that the parties documented any arrangement they reached, and in particular that they agreed upon a final version of the scope of works document.

Schedule 6 to the draft agreement for lease was to be a plan of the Premises. There is no evidence that the parties produced a final form of this plan, particularly one that identified the situation of the structural columns (whether or not they were placed within the gondolas that would be constructed in accordance with the development approval obtained by Karellas).

The evidence shows that, following the execution of the heads of agreement, Finger explored the further development of the Property to accommodate the construction of residential home units above the premises to be leased to Karellas, the loading area and the car park.

On 2 February 2010, Ben Finger received, apparently from a consultant of some description, a hand-written concept plan that appears to show 15 apartments (see Ex A 2466). The plan shows a single access from ground level at the position of the 22 m² area that was reserved in Revision C. The apartments are placed above the car park and the loading area, as well as the area proposed to be leased to Karellas.

On 12 February 2010, Ben Finger forwarded the concept plan to a person, who I infer from the email address is an architect. The plan was forwarded without comment.

The next step appearing in the evidence is that, on 15 February 2014, Ben Finger sent to Mr Vigdor a new hand written concept plan with the comment “I wanted to show you this so you understand what we have in mind”. Mr Finger said: “Given that this future level will extend over the car park and loading dock, does this have any implications on our design today that we haven’t considered?” The plan (see Ex A 2719) appears to show 11 apartments, a garbage room, a plant room and storage cages superimposed on a Revision B plan of the Property.

On the same day Mr Vigdor replied by email to Ben Finger, to make a number of comments on the concept plan. He said that he thought that the slab would have to be saw cut, and that “there’s just too much happening to allow for all Building Services to be accurate at this stage”. He said, concerning the structure, that he assumed that all future loadings were accommodated within the existing design. He noted that the garbage room was on the second level; he enquired as to how the garbage would be taken to street level; and suggested that it might need to be on the ground floor. He also said: “Travel Distances – You are not complying. You need 2 pt of choice from a given pt”. The meaning of this statement was not explained in the evidence. I infer that it is a reference to the single point for the lift and stairs within the reserved 22 m² area. I also infer that it refers to the probable need for residents to have a choice of more than one means of gaining access to the street from the home units on the second floor.

On 15 February 2010, Ben Finger also received an email from the architect attaching a diagram described as “diagram of a possible attic (second floor) to ensure we are on the same page”. The diagrams (see Ex A 2724, 2725) appear to be computer-generated, are of a conceptual nature, and show the bulk of a possible second storey addition to the Property. The structure depicted in this manner covers the whole of the Property.

On 17 February 2010, Mr Vigdor sent an email to certain consultants and the project manager, in which he referred to “the overall decision as to whether the Residential slab will be exercised”.

In an email dated 17 February 2010 from Mr Vigdor to the project manager, Mr Vigdor referred to the “Residential Slab” and asked for “Structural Steel / Preliminaries / Roof sheeting removal / Concrete et cetera to be priced for client’s review and determination”.

On 22 March 2010 the project manager sought further information from Mr Vigdor to be provided by 26 March 2010, as follows:

Mr Vigdor responded to the program manager on 23 March 2010. Mr Vigdor commenced by stating: “The entire notion of a future DA (Residential scheme) has inherited “approval risks” which the client is unable to qualify at this stage for obvious reasons”. He concluded by stating: “Obviously we all understand the client’s intention and preference to hold off on design and construction based on a scheme which may or may not be designed and built”.

Mr Vigdor nonetheless provided a number of specific responses to the project manager “to provide you with some insight as to what the client has in mind”. He continued: “We only forward the attached as and for information purpose only (not to be circulated) so as to assist us in formulating our response to your consideration as below”. The responses related to the request for information in par 3 of the project manager’s request. Mr Vigdor gave an instruction to “design a thin slab with intent of constructing a future slab”. He instructed in relation to a number of other requests that they were either not required or to be dealt with later. He said in relation to “Fire egress from residential units”: “[project manager] to explore possible part – (Not document or construct) – Simply review and advise whether the design consultants believe such path is possible for future implementation”.

On 9 April 2010, Mr Vigdor sent to Harold and Ben Finger costings provided by the project manager for three options that are described in the subject heading of the email as “Newtown – Resi Slab Options”. Mr Vigdor made the comment: “As agreed, no further design or cost checks will be carried out until a decision is made by you re: Section 96 documentation”.

There is no further evidence of consideration by Finger of the possible development of the second floor of the Property for residential purposes before the date of the alleged repudiation of the contract by Karellas on 9 June 2010.

On 24 June 2010, before Finger terminated the contract, Ben Finger sent an email to Finger’s then architect, that referred to a meeting the day before, and stated “I was very impressed with the design”. Mr Finger asked to be provided with “a soft copy of the design, as well as the ground floor / mezzanine plan as discussed showing grid layout and floor areas.

The architect responded the same day by email, which contained an attachment described partly as “Sketch Resi Scheme”. The email included a statement: “An alternative mezzanine plan will be issued shortly, with the residential units removed”. There is also the statement: “The original trading area was 707 m² and now achieves 677 m², taking into account the revised stair layout”.

The attached drawings (see Ex A 3651 – 3656) contain a number of relevant features. The 22 m² area in Revision C that was reserved for access to the upper floor now only accommodates a stairwell. Part of the area that was formerly included in the trading area has been excised to provide for a second stairway to the second floor and for a lift. There appear to be six structural columns within the trading area to support the first floor slab, above which residential units will be constructed. It appears that four apartments are provided for on what originally was the mezzanine level over the car park. There appear to be 18 two-storey apartments provided for on the second level. The apartments are situated over the trading and back office areas, the loading area, and the car park.

On 24 June 2010, the architect provided a further set of drawings (see Ex A 3659 and 3660) with the “residential units removed”. These two pages are identical to two of the earlier drawings (Ex A 3651 and 3652) with the four residential units shown on the second of these drawings, apparently on the mezzanine level above the car park, removed.

Ben Finger was cross-examined (T 46 and 47) about Finger’s proposals concerning the future redevelopment of the Property for residential purposes, and why Finger did not provide any information to Karellas concerning those intentions. Mr Finger denied that, as early as January or February 2010, he and his father intended at some stage in the future to develop the property, by putting on an extra story of residential development. He said that Finger did not have that intention in the first half of 2010. Asked whether Finger wanted to build a cement slab on top of the premises to future proof the property, Mr Finger answered “yes and no”. He said that there was future proofing so that they could do a development, but they did not know what that development was going to be at that time. He denied that Finger was pretty certain it was going to be residential. Mr Finger accepted that he “understood at the time that within the heads of agreement… there was an obligation on the Fingers to let the Karellases know what was going to happen in relation to future development” (T 47), but, asked to respond to the proposition that, at no time had Finger told Karellas that it was its intention to do some residential development on top, he said: “We would have if we knew that that was our intention”. When questioned about the level of certainty that Mr Finger thought was necessary before Finger had to provide information to Karellas, Mr Finger’s response fairly clearly suggests that it was his view that there was no need to provide information until Finger was certain that it would proceed. He said: “There was nothing hidden. We were merely just exploring at that point in time and in my experience there’s things that you’ve got to do to understand an element of the feasibility and that’s what we were doing”.

The evidence that I have outlined above establishes that, over the period from at least early February 2010, Finger was seriously exploring the design of a residential development for construction above the premises proposed to be leased to Karellas. There is no evidence that Finger considered any other type of development. The various plans that were developed were conceptual in nature. During the period Finger did not form any definite intention to proceed with a residential development; at least so far as the evidence discloses. Finger pursued to some degree the possibility of designing the reconstruction works for the proposed supermarket in a way that would “future proof” the development. When Ben Finger used the expression “future proof”, I understood him to mean to design and construct the supermarket in a way that would facilitate and make more economical any subsequent decision to further develop the Property. Additionally, its purpose was to try to reconstruct the Property for the purposes of the supermarket in a way that did not significantly impede any later redevelopment. The evidence shows that Finger was conscious that its aspirations for further development might not be realistic, because of commercial and planning considerations. It aspired to reducing its expenditure on future proofing because the money spent would be wasted if the further development did not occur. Finger gave specific instructions to its consultants to limit their efforts directed towards future proofing.

I will now return to consider the defences that Karellas raised their defence, that proceeded upon the assumption that the heads of agreement was a concluded and binding contract. It may seem somewhat out of place to deal with these issues here, but they are best considered after the facts that relate to the defence have been dealt with.

Karellas plead a number of defences that would take effect if their primary argument that the heads of agreement did not constitute a final and binding contract was rejected. The effect of those arguments is that the heads of agreement was not a contract susceptible of being repudiated in June 2010, because of events that had occurred, or had not occurred, after the date of the heads of agreement.

First, Karellas plead in par 1(b) that the heads of agreement was based on Revision C, and, in clause, 1 Karellas reserved the right to amend their offer in the event of “further amendments, designs or changes to configurations”. They pleads in par 1(h) that the effect of the Council’s approval of the two s 96 applications referred to above was that the right to amend contained in clause 1 was triggered. Then they allege in par 1(r)(ii) that Karellas were entitled to amend their offer.

I reject Karellas’ claim based upon the s 96 application made on 10 February 2010. That application appears principally to seek the necessary approval for the internal layout of the supermarket, both in the trading area and the back office area. I understand it also concerned approval of the mezzanine floor in the back office area. The first reason I reject the claim is that, although Finger formally made the application (which it had to do as the owner of the Property), the evidence shows that the application was effectively prepared by Karellas, and made at their request. If so, Karellas could not then claim a right to amend the agreement or withdraw from it because of any changes made. Secondly, although the effect of the application was to make a number of changes compared to the original development approval, I am not satisfied that the changes were, in any material way, inconsistent with Revision C.

The validity of this defence is much less clear in so far as it relies upon the second s 96 application that was made to benefit Finger. Revision C consisted more of concept plans than detailed drawings. They appear to be comparable to the level of detail included in drawings prepared for the purpose of seeking development approval.

As I have said above, I have accepted the evidence that Finger proposed to construct a first floor slab to facilitate later development above the supermarket. I have not been able to identify any plan that shows the dimensions of that slab. Revision C provided for a Bondeck slab above the trading and back office areas. I have accepted that the proposed slab following Finger’s s 96 application covered the whole of the Property (not least because that is consistent with Finger’s submissions). Revision C did not depict any structural columns to support the Bondeck slab, but it probably implied that there would be such columns, because the slab had to be supported. In any event Ben Finger advised Karellas that further columns would be required, and Karellas did not demur.

It does appear that the situation of the plant room was changed from being on the roof above the car park to a newly constructed small mezzanine platform in the car park. There is no suggestion that this proposal interfered with the ability of Finger to provide the 16 retail car parking spaces required by the heads of agreement. There is also some evidence of changes being made in relation to a “wet wall”. I have not discussed this evidence above, as I do not understand it.

The better view is that the right to vary Karellas’ offer contained in clause 1 of the heads of agreement required that any alterations to Revision C be material.

It is clear from the evidence that Karellas did not at any time before Finger terminated the heads of agreement attempt to change the terms of that document, or withdraw from the contract, on the ground that clause 1, had been triggered. As will be seen when the relevant correspondence is considered, Karellas did not even attempt to rely upon clause 1, after it had suffered the shock of learning that the forecast turnover may have been much less than it had expected, and it was in some dire need to find a basis for either withdrawing from the contract, or obliging Finger to vary the commercial terms in the heads of agreement.

One consequence of the fact that Karellas did not go into evidence (other than to rely upon a number of documentary exhibits) is that Karellas did not attempt to prove in any detailed or technical way what changes were made by means of the second s 96 application (particularly in relation to the dimensions of any first floor slab), and whether any changes were material in relation to Revision C. They are technical questions that the Court should hesitate to attempt to answer itself on the basis of its own review of the documents.

I have found, on the balance of probabilities, that one aspect of Finger’s s 96 application was that it introduced the construction of a floor slab on the first floor over the whole site area of the Property. Revision C only depicted a Bondeck slab over the trading and back office areas. I consider that change to be material. It had consequences as to the extent of future development of the Property that could be carried out on the first floor. The more extensive that development, the greater the likely disruption to Karellas’ trading activities.

Finger did not plead that Karellas were estopped from exercising their rights under clause 1 of the heads of agreement because they had approved Finger’s s 96 application, or stood by with knowledge of it, and Finger had changed its position accordingly.

But, as I have noted, Karellas did not exercise any right under clause 1 to withdraw from the contract before their alleged repudiation of it.

As a matter of law, does a party’s act of repudiating a contract cease to have that effect, if the party had an alternative right to withdraw from the contract, and so terminate it, which it did not use?

I prefer the view that, if the contract was on foot because Karellas had not exercised a right to withdraw, conduct that amounted to a repudiation would justify termination of the contract by Finger. The extant, but unused, right to withdraw would be a matter relevant to whether or not Finger suffered damage as a result of the repudiation.

As I understand the defence, the next claim made by Karellas depends upon the allegations in par 1(r)(iii) and (iv), that formal documents had not been executed, and performance of the matters pleaded in par 1(j) to (n) had not occurred, so that negotiations were continuing. The matters that had not occurred were the conclusion of agreement on all covenants required under clause 17; the parties had not finalised a design brief taking into account the s 96 changes required under clause 11; the parties had not finalised a development program under clause 12 for the same reason; finalised development programs under clause 21 had not been accepted; and the parties had not agreed final development plans, programming, scope of works, specification and finishes under clause 22.

In the way that I have explained, the parties had gone a very long way to satisfying the requirements of these provisions of the heads of agreement. There were matters that remained outstanding, and it is true that final agreement and the preparation of final documents had not occurred.

However, this aspect of Karellas’ defence must be considered in the context that Karellas has assumed that the heads of agreement were binding (as I have found), and I have also found that Karellas were subject to an implied obligation to cooperate with Finger, and negotiate towards completing these steps – Karellas being under an implied obligation to act reasonably, or alternatively honestly, in relation to whether or not they were satisfied. If that is correct, then it would not matter that the various steps required to be taken under the heads of agreement had not been brought to final fruition at the date of the repudiation. Plainly, a contract can be repudiated, notwithstanding that all steps required to be taken under it for some purpose have not yet been completed. In principle, this aspect of Karellas’ defence could not protect them, if their conduct in June 2010 was repudiatory.

The third aspect of Karellas’ defence, based upon the assumption that the heads of agreement was binding, is pleaded in par 1(r)(v) and (vi) of their defence. Karellas allege that Finger was required to disclose to Karellas that the proposed development direction of the property comprised the construction of 20 residential units above the supermarket, and to provide a master plan under clause 15, but did not do so in breach of that clause. Then, had Finger disclosed that matter, Karellas would have required an acceptable master plan, and finalised development plans, in the context of the proposed development; they would have required agreement under clause 17 as to various matters listed in the particulars to par 1(j) (being detailed covenants to protect Karellas during the course of the construction of the proposed residential development); and Karellas would have considered whether to enter into an agreement for lease and lease having regard to those matters.

In relation to the residential development proposal entertained by Finger, Karellas plead that, at the time of the alleged repudiation, and at the time of the termination, Finger held the intention to amend the original development approval in accordance with the actual development application it made on 21 January 2011, which was approved on 16 May 2011, under which Finger constructed the 20 residential unit development on the Property that it eventually constructed. I will deal with the actual development that occurred below, in the context of considering the claim for damages made by Finger.

There is in my view a considerable degree of similarity between the residential development proposals that Finger was considering in concept during the first half of 2010, and the design of the residential development that Finger ultimately prepared, and implemented. However, the question whether Finger breached clause 15 of the heads of agreement does not depend upon the degree of similarity between the proposal that Finger was exploring in 2010, and that which it implemented at a later time. I have dealt with this issue above, and found that, during the relevant part of 2010, Finger did have a proposal concerning the future development direction of the Property, albeit one that was conceptual, provisional and under investigation.

I have already found that clause 15 required Finger to disclose the position that it had reached concerning the future development direction of the Property. That finding is made the easier because Finger disclosed nothing to Karellas. It is not necessary to consider the ambit of the requirement for disclosure. Clause 15 imposed a positive disclosure requirement on Finger, and it was not absolved from the need to make the disclosure because its plans were conceptual and provisional. As Finger had plans, Karellas were entitled to know what they were, so it could negotiate covenants contemplated by clause 17 to protect itself, whether or not Finger decided to proceed with the development.

The part of par 1(r)(v) of the defence, in which Karellas allege that it was a breach of the heads of agreement for Finger to fail to provide a master plan to Karellas, fails because clause 15 did not impose that obligation on Finger.

As Karellas did not call the necessary evidence, they did not carry the burden of proving that, if disclosure had been made, Karellas would have taken the steps set out in par 1(r)(vi) of their defence. What Karellas would have done is a matter of speculation. It is probable that Karellas would have carefully considered the implications of the actual future development direction. It is not established that Karellas would in fact have required covenants other than those that were already contained in the draft lease, particularly clauses 13.11, 13.12, 13.13 and 25(c) that have been set out above.

Karellas would not have been entitled to require Finger to deliver a completed master plan, but on the other hand Karellas had until 21 December 2010 to continue negotiations, and there may well have been further enquiries that they could have made, and information that they could have demanded, consistently with an obligation to act reasonably in relation to the settlement of the terms of the formal documentation. As a matter of fact, it is possible that, even acting reasonably, the parties would not have been able to settle the terms of the formal documentation until the period to 21 December 2010 elapsed, so that Karellas had a right to withdraw.

Karellas did not have a right to consider whether to enter into an agreement for lease and the lease, having regard to the future development direction of the Property.

The significant point is, however, that, at the date it purported to terminate the contract, Finger had not complied with clause 15. I will consider the significance of this apparent breach below, when considering whether Finger effectively terminated the contract.

It will be convenient to note, however, that Finger itself alleges that the heads of agreement contained an implied term that imposed a duty on both parties to act reasonably to settle the terms of the formal documentation embodying the terms and conditions set out in the heads of agreement, in the sense that I have considered above. That term, in so far as it was implied as considered above, was mutual. An implied obligation upon Finger to act reasonably would probably not have obliged it to disclose its residential development proposals in isolation of the existence of clause 15. But given the terms of clause 15, if Finger was required to act reasonably to facilitate the settlement of the terms of the formal documentation, including the covenants required by clause 17, Finger ought to have disclosed to Karellas the information that it had concerning the residential development proposal, albeit with whatever qualifications and contingencies existed.

The balance of the defence has the effect of putting various factual matters and legal consequences in issue between the parties.

However, the effect of par 5 of the defence is to deny Finger's allegation, in par 10 of the statement of claim, that the contract contained an implied obligation on the parties to act reasonably to settle the terms of the formal documentation for an agreement for lease, embodying the terms and conditions set out in the contract (with such variations or further terms as the parties might subsequently agree to).

Further, in par 8 (b) Karellas admit that their solicitor's letter dated 9 June 2010 contain statements to the general effect set out in par 14 (1) to (4) of the statement of claim. Karellas denied the alleged implication in subpar (5), that Karellas were not willing to continue negotiations except for the purposes referred to in par 14 (4).

As will be seen, after the date of the alleged repudiation of the heads of agreement by Karellas, Mr Reid on behalf of Finger made an allegation that one of the reasons why Karellas had refused to proceed with the execution of formal documentation was that Karellas had been unable to gain the approval of the Council for the use of shopping trolleys in the proposed supermarket. That claim was not substantiated by the evidence, so it is not necessary to consider this issue in detail.

As I have noted above, one of the conditions of the Original Development Approval was that shopping trolleys could not be used in the supermarket. Consequently, shoppers would have to use baskets. The advantage to the operator of a supermarket of being permitted to make trolleys available for the use of shoppers is obvious, as it would permit shoppers to buy greater quantities of goods by carrying those goods in trolleys, and, if permitted, from the supermarket to their cars.

The evidence suggests that the Council had a policy of not permitting any use of trolleys in the Newtown area, including trolleys that could only be used within the supermarket. Because of traffic congestion, and limited car parking opportunities, the Council did not want to encourage shoppers to visit the supermarket from a wide catchment area, in circumstances that might require the use of cars. Accordingly, the Council prohibited any use of trolleys, both inside and outside the supermarket. If shoppers were limited to using baskets, then the supermarket would tend only to attract shoppers from a restricted local area, because shoppers could only carry a limited amount of goods to the checkout.

Karellas made a significant effort to persuade the Council to grant limited approval for the use of a small version of shopping trolleys solely within the supermarket. Karellas (with considerable assistance from Finger) attended meetings with Council officers, put a formal submission to the Council, and included an application for permission to use trolleys in the s 96 application that it arranged for Finger to submit on its behalf in relation to the layout of the trading area of the supermarket, and other matters.

On 2 June 2010 the Council rejected the trolley component of the application.

Both Harold and Ben Finger gave evidence of attending a meeting with Vasilli Karellas on 31 May 2010, during which Mr Karellas said, in substance, that he was surprised that the supermarket turnover mentioned at the Council meeting was in the order of $7-$8 million. He had been working on a much higher turnover (which Ben Finger remembered as being given at $13-$15 million). Mr Karellas said that he would commission his own economic report, which would take about a week. The observation made by Mr Karellas was apparently prompted by information that came to light at a meeting of representatives of Karellas, Finger and the Council.

It was not put to Ben Finger in cross-examination that this statement was not made by Vasilli Karellas, and Harold Finger was not cross-examined at all.

On the 4 June 2010 Karellas received a report from their consultant concerning population statistics and forecasts that led to forecasts of the turnover that the proposed supermarket might enjoy. The forecasts ranged from an estimate of $9.8 million in turnover for the year ended 30 June 2013 to $14.2 million for the year ended 30 June 2026.

Vasilli Karellas provided a copy of this report as an attachment to his 8 June 2010 email to Ben Finger, which is one of the documents that Finger alleges constituted a repudiation of the heads of agreement by Karellas.

Karellas did not lead any evidence to explain the significance of the forecasts in the report. As Karellas also did not call any witnesses, there was no cross-examination concerning the forecasts.

The parties agree that a party will be taken to have repudiated a contract if the party manifests the intention no longer to be bound by it, or to fulfill the contract only in a manner substantially inconsistent with that party’s obligations, and not in any other way.

Finger submitted that the issue of whether conduct was repudiatory of a party’s obligation to perform a contract depended upon what a reasonable person in the position of Finger would understand the conduct to mean (T 120). Karellas accepted that principle in their final written submissions.

Finger made a number of other submissions as to how the test of whether conduct is repudiatory should be applied. It said (T 122) that the question is simply to decide, in the ordinary civil process on the balance of probabilities, whether a reasonable person in the position of the recipient of Mr Toole’s 9 June 2010 notice, would understand that it manifested the intention no longer to be bound by the contract, or to fulfill the contract only in a manner substantially inconsistent with Karellas’ obligations, and not in any other way. Finger also submitted (T 123) that, when Finger received the letter saying, we will not proceed with the lease on the current terms, it was at least possible that what was being said was that Karellas were not going to proceed with the commercial terms that were part of the heads of agreement.

Finger relied in particular on the recent decision of Kunc J in Southern Cross Autoglass Pty Ltd v Protector Glass Industries Pty Ltd [2014] NSWSC 261. That case concerned an asset sale agreement, under which the plaintiff was obliged to sell certain assets to the defendant, provided a number of conditions were satisfied. The plaintiff had acquired certain of the assets under the terms of a charge granted by another company. Special-purpose liquidators appointed for the chargor conducted a liquidator’s examination, and subsequently their solicitors wrote a letter to the defendant. The letter advised the defendant that the plaintiff’s title to the assets acquired by means of the charge was questionable, as a result of information obtained during the examination. The letter suggested that the solicitors would recommend that steps be taken to avoid the charge. By letter dated 23 January 2009, which the plaintiff claimed repudiated the defendant’s obligations under the asset sale agreement, the defendant gave the plaintiff “formal” notice, because of the “level of uncertainty over the title and ownership of [the plaintiff’s] assets and in particular the inventory”. The defendant gave the plaintiff 30 days’ notice in which either to obtain a declaration from a court that the plaintiff had good title to the assets, or to conclude an agreement between the plaintiff, the defendant and the special-purpose liquidators, that established the plaintiff’s right to sell the assets to the defendant. The letter stated that, if either one of these outcomes “is obtained within the notice period, [the defendant] would then be happy to proceed with the asset sale agreement”. However, “if at the end of the thirty (30) days your legal matter has not been resolved, we will need to review the support arrangements with you. Further, if at the end of the notice period, you have been unable to resolve the legal matter and [the defendant] is still unclear over the ownership of the [plaintiff’s] assets, we will have to terminate the asset sale agreement”.

The asset sale agreement did not contain any provision that gave to the defendant the right to require the plaintiff to take either of the steps demanded by the notice, before it completed the agreement. The asset sale agreement contained a term that gave the purchaser the right to deduct the cost of any asset claimed by a third party from the purchase price.

Kunc J found that the defendant had repudiated the asset sale agreement.

Kunc J set out the following statement of principle concerning the nature of the conduct that is necessary to constitute the repudiation of a party’s obligations under a contract.

His Honour then set out the competing submissions of the parties and said:

It may be that Finger’s submission in this case, that the question is simply to decide, in the ordinary civil process on the balance of probabilities, whether the conduct satisfies the test for repudiation, was based upon Kunc J’s observation in the paragraph set out above, that he was “satisfied on the balance of probabilities that such a reasonable recipient” would draw the required inference.

The test stated by Kunc J at [123] in Southern Cross Autoglass is supported by the reasons for judgment of the plurality of the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007-2008) 233 CLR 115. Gleeson CJ, Gummow, Heydon and Crennan JJ said in their joint judgment (citations omitted):

Their Honours gave as their authority for the test, that depended upon what would be conveyed by the conduct to a reasonable person in the situation of the other party, the decision of the High Court in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 659. At that page Deane and Dawson JJ said:

Deane and Dawson JJ had, however, on the previous page of their reasons said:

Each of the other Justices also expressly approved Fullagar J’s statement in Carr v JA Berriman Pty Ltd (1953) 89 CLR 327: see Mason CJ at 633 and Brennan J at 644. Gaudron J at 666 said:

Sight should not be lost of the fact that the rule that the Court looks to how a reasonable person in the position of the innocent party would view the allegedly repudiatory conduct is based upon a foundation that requires that “a reasonable man could hardly draw any other inference than that” the conduct was repudiatory.

I do not think that the members of the High Court in Koompahtoo or Kunc J in Southern Cross Autoglass intended by their simplified expression of the rule to exclude the requirement suggested by earlier authority that the reasonable person confronted by the conduct said to be repudiatory must be satisfied that it does constitute a repudiation of the contract in a clear and unequivocal way.

In Plumore Pty Ltd v Handley (1996) 41 NSWLR 30 McClelland CJ in Eq said at 39 (citations omitted):

It should be noted that Kunc J, in relying upon the decision of Laurinda at [123], cited all of the pages of the judgment in that case to which I have referred above, which suggests that his Honour intended to apply those principles. Further, his Honour used language in setting out his reasons for concluding that the defendant’s conduct was repudiatory, that suggests his Honour understood that the conduct had to be such that the reasonable person could hardly draw any other conclusion than that repudiation was intended (see the expressions “could have been left in no doubt” [135] and “the letter makes it abundantly clear” [138]).

The question whether conduct is repudiatory is one of law that is decided upon an analysis of all of the relevant facts. It is not answered by asking whether it was in fact reasonable for the party confronted by the conduct to treat it as constituting a repudiation of the contract. The Court does not ask whether the conduct falls within a range that reasonable persons could consider to be repudiatory. The Court does not ask itself whether on the balance of probabilities the conduct was a repudiation of the contractual obligations, as that would be an approach suitable only for the determination of a question of fact. The reasonable person who is the subject of the test is a conceptual construct that, in a manner common to the law, is assumed to exist to guide the Court itself to make the determination of whether the conduct sufficiently manifests the intention no longer to be bound by the contract, or to fulfil it only in a manner substantially inconsistent with the party’s obligations, and not in any other way.

As I read the judgment of Kunc J in Southern Cross Autoglass, his Honour, with respect, applied the proper test in so far as he refers to “the hypothetical reasonable recipient” [127], and refers in a number of places to “the reasonable recipient” [129], [130] and [137].

Another issue in these proceedings is whether Finger was not entitled to terminate the heads of agreement, even if Karellas’ conduct was repudiatory, because Finger was also in breach of the contract at the date of termination.

The principle applicable to a contractual party seeking to terminate for alleged breach or repudiation, when that party is itself in breach, has been stated by the Court of Appeal in Idameneo Pty Ltd v Ticco Pty Ltd [2004] NSWCA 329 at [97] (Santow JA; Mason P and Hodgson JA agreeing) in the following terms:

In Almond Investors Ltd v Kualitree Nursery Pty Ltd [2011] NSWCA 198, Bathurst CJ said (Giles JA at [91] and Handley AJA at [92] agreeing):

These authorities appear to establish a principle that, where party A has repudiated the contract, party B will not be entitled to terminate the contract, if party B is itself in a state of repudiation, or is in breach of an essential term of the contract (whether a condition in the strict sense, or an intermediate term where the consequences of the breach are such that party A would be entitled to terminate the contract). Party B will not be disentitled from terminating the contract if party B is in breach, but the breach would not entitle party A to terminate the contract. The law does not require party B, who is in breach of some non-essential term of the contract, to take all of the steps necessary to remedy that breach, in the face of an existing repudiation by party A, before party B is permitted to terminate the contract for repudiation.

On 8 June 2010 at 12:41 PM Vasilli Karellas sent an email to Ben Finger in the following terms:

Finger pleads in par 15 of its statement of claim that Karellas repudiated the contract, when it said the things contained in this email, and a subsequent letter written by its solicitor on 9 June 2010.

The statements made by Vasilli Karellas in this email may form part of the context in which the subsequent letter was written, and may be relevant to whether that letter was a repudiation of the contract as alleged. I do not accept that the email by itself was a repudiatory act. The email merely made a statement that the business would not be viable for Karellas with the identified level of turnover and on the proposed lease terms. It asked Ben Finger to call Vasilli Karellas to discuss the issue when convenient.

It is relevant at this point that I record a finding that I have made, based upon an assessment of all of the communications between the parties that are in evidence, that until this point the relationship between the parties was cooperative, congenial and collegiate. That is a conclusion that I have reached by looking at the way each side addressed the other, the frequent occasions when one party communicated to its consultants information of a relatively private nature, but copied the other party, and the general tone of the communications. I will not attempt to justify that finding by an exhaustive review of snippets from a great many documents. It is true that at all times the parties communicated with each other at arm’s length and in their own interests. However, I have not sensed from the evidence that the goodwill expressed frequently in the communications was artificial. This finding is subject to the odd communication, at the end of the period, where Ben Finger expressed some exasperation with the tardiness of Karellas.

I have made that observation at this point because, far from finding the email to be an act of repudiation, I consider it to be a genuine request, even though in retrospect perhaps somewhat guileless, to see whether Finger could in some way accommodate Karellas’ difficulty.

The email came totally out of the blue, so to speak, and it probably shocked Ben Finger. If its receipt caused considerable irritation to Mr Finger, that would not be unreasonable, or unexpected.

It is self-evident that Karellas should not have proceeded to the point that they did, without obtaining by their own efforts whatever expert turnover forecasts were necessary to enable them to make their own commercial decision that the proposed supermarket was sufficiently viable for Karellas’ purposes.

In final submissions Finger put an argument that, as a matter of fact, the shortfall between the forecast turnover that Karellas initially believed, and the subsequent reduced turnover forecast that caused Vasilli Karellas to write the email, was so large as to make the supermarket business objectively unviable to Karellas. I do not accept that that proposition follows merely from an analysis of the amount of the forecast shortfall in turnover. It may well be true as a fact, but in principle reductions in turnover may be able to be accommodated by reductions in costs and other responses. Finger did not plead that the effect of the reduction was to make the supermarket unviable in fact. It was not an issue that was litigated in any real way. The allegation is not available on the pleadings.

However, it probably does not matter to the outcome of the proceedings, whether or not the shortfall in forecast turnover had the consequence in fact that the supermarket became unviable to Karellas. The issue of whether Karellas repudiated the contract does not depend upon the truth of the underlying fact, but upon the objective meaning of what Karellas said, and how its words would reasonably be understood by Finger.

It is sufficient to take Karellas at its word. Karellas said that the business was not viable. There is no basis for adding to that statement any inference concerning the extent of the lack of viability.

The statements made in the email do require the conclusion that, for the purposes of the subsequent communications, Karellas were acting in the belief that it would not be viable for Karellas to proceed upon “the proposed lease terms”. In my view the use of the word “lease” encompasses the proposed agreement for lease, and that Vasilli Karellas used the single word “lease” as shorthand. As of 8 June 2010 the natural meaning of the expression “the proposed lease terms” was the currently proposed draft of the agreement for lease and the lease. That would encompass so many of the terms in the heads of agreement as had been included in the original draft lease and agreement for lease, but would also extend to the variations and additions. The comment referred to the proposed lease terms globally, and did not separately identify particular terms.

Ben Finger did not respond to the email in the way requested by Vasilli Karellas, in that he did not call Mr Karellas to discuss the issue. He did not investigate the reasons behind the email, and did not enter any discussions personally with Mr Karellas.

At 5:08 PM on 8 June 2010 Ben Finger responded with an email addressed to Vasilli and Andrew Karellas as follows:

There is in my view a threat, but only a veiled one, in the final sentence. There is nothing unreasonable in the terms in which that sentence was written. The expression “and look forward to your favourable response” is not precise as to the exact nature of the response that was expected. It would be wrong to read too much into a response, written in the heat of the moment, to such an unexpected communication as Mr Karellas’ email. However, on balance, the more likely meeting is that Mr Finger expected Karellas to proceed with the settlement of the formal documents in their then current form, and to execute those documents. Certainly, Mr Finger said nothing about the parties reverting to the terms of Karellas’ standard documentation, and the commercial terms contained in the heads of agreement, without the additional variations and additions that had been agreed in principle.

The following day, 9 June 2010, the defendants' solicitor, Mr Toole, wrote the following letter to the plaintiff's solicitor. This is the letter that the plaintiff alleges contained a repudiation of the heads of agreement.

It is clear from the first sentence of the letter that Mr Toole was responding to Ben Finger’s email response of the previous day.

The first substantive statement made by Mr Toole in the second paragraph was that Karellas “will not be proceeding with the above proposed Lease on the current proposed terms”. It is at least clear that he was referring to the formal documents in their then current form. That statement would encompass all of the terms, whether part of the commercial terms set out in the heads of agreement, or not. It would include the covenants that had been provisionally agreed in response to clause 17, and it would include the variations and additions.

As it is obvious that the level of rent payable under a lease is at least one primary factor that governs the commercial viability of the business to be conducted from the leased premises, it must be accepted that the reader of this statement, who had received Vasilli Karellas’ 8 June 2010 email, would understand that at least a primary motivation for this statement by Mr Toole was an aspiration to achieve a reduction in the rent that had been agreed. However, the fact remains that the statement that was made related to all of the current terms.

The second thing Mr Toole did was to state a willingness to continue negotiations, however that statement was confined by the identification of the objective as being to see if a suitable outcome could be achieved for both parties.

In due course it will be crucial to analyse the significance of these statements, in the light of the real legal situation as to the rights and obligations of the parties at that stage, including all of the doubts as to what the position was.

The third paragraph of Mr Toole’s letter proceeds upon the expressed basis that Mr Finger’s email “seems to suggest that there is already a concluded agreement for lease”. In my view that is a fair reading of Mr Finger’s email, although it requires the meaning to be read into the words used. It is at least a reasonably available understanding of what Mr Finger intended. (As will be seen from the subsequent correspondence, if Finger believed that Mr Toole’s understanding was wrong, it could have corrected him, but did not).

In my view, the statements made by Mr Toole, in the balance of the third paragraph of his letter, are in substance correct and justified. They at least express a reasonable view as to the then current legal position. My reasons for that conclusion follow from the discussion that I have set out above.

I have not ignored the use of the past tense in the fifth paragraph in the words “were” and “saw”, which tend to suggest that Karellas viewed its relationship with Finger as being in the past. It would be wrong, however, to place too much significance on the tense of these words.

In the sixth paragraph Mr Toole commences his explanation of the two factors that he says contributed to Karellas’ decision not to proceed with the formal documents on their current proposed terms. The first concerns the impact of a future development of the Property on the proposed supermarket business.

The statement that the concern had been raised with Finger on a number of occasions is not supported by any independent evidence. The fact is not, however, improbable. The evidence does not permit a positive finding that those concerns were raised, or what was said if they were.

Mr Toole then says that the likelihood of this further development of the site became apparent to Karellas in discussions since December 2009. Clause 15 of the heads of agreement merely recognised the right of Finger to develop the Property. The circumstances in which the obligation on Finger to prepare a master plan, that was satisfactory to Karellas, was deleted from the heads of agreement should have caused Karellas to understand that Finger did not expect to be in a position to be able to finalise its proposals for further development in time to prepare a master plan, before the expected time when the agreement for lease would be executed. The existence of the Bondeck slab above the ceiling of the proposed trading and back of house areas in Revision C suggested a general intention that there would be some form of development constructed over those areas. After the date of the heads of agreement, the making of the s 96 application (at least in relation to some of its aspects, particularly in relation to steps taken to ‘future proof” the Property), and the lengthy negotiations leading towards the formulation of clause 13.11 of the draft lease, could well have turned Karellas’ mind to the significance of any future development, and the possible deleterious consequences to Karellas’ supermarket business.

As Vasilli and Andrew Karellas did not give evidence, there is no evidence concerning the circumstances in which Mr Toole came to express Karellas’ concerns about the consequences of breach development. The truth of the statement that he made is not improbable. However, on the other hand, it cannot be ruled out that, given the surprise experienced by Karellas about the effect of the later turnover forecasts, the concern about the consequences of future development could have arisen as part of some consideration of the legal and practical grounds that may have been available to create a bargaining position for Karellas, to attempt to achieve a more satisfactory outcome.

In principle it was legitimate for Karellas to reconsider their position, even if the terms of clause 13.11 had been agreed in principle. The covenants to be included in the lease were of cardinal importance to Karellas, if it was to be obliged to continue to operate its supermarket business, while Finger conducted some additional development of the Property around it.

It is in fact immaterial how Karellas came to raise the first reason expressed by Mr Toole for their unwillingness to proceed with the proposed lease on the current proposed terms. The fact is that it did so. The question will be whether that stance was legitimate.

It is pertinent to observe that, whatever caused Karellas to express this concern, and whether or not Karellas had an inkling of what Finger’s current aspirations were concerning the future development direction of the Property, there was a good underlying basis for Karellas’ concern. All of the concept development plans prepared for Finger, up to that time, contemplated a residential development over the whole second floor that extended beyond the area of the Bondeck slab in Revision C.

The statement in paragraph six, that Karellas had “decided that any development of the site will have a significant detrimental impact on the Supermarket business to be operated from the site”, is not in terms a refusal to enter into any formal documents that permitted Finger to carry out any additional development. It is a statement of Karellas’ view about the consequences of future development. The statement probably implies an aspiration by Karellas to achieve a position where there would be no future development. If the proper meaning of the statement was that Karellas would not enter it into any formal documents that left it open to Finger to conduct any future development, that would be inconsistent with clause 15 of the heads of agreement, which expressly acknowledged that Finger had that right.

The seventh to ninth paragraphs of the letter provide an explanation as to why Karellas had formed the view that Vasilli Karellas expressed in his 8 June 2010 email, to the effect that the shortfall in turnover would make the supermarket business unviable on the proposed lease terms. The explanation given is at least questionable, and there is insufficient evidence to support its validity. It is, however, immaterial whether or not the reasons given were true or justified.

The statement in the penultimate paragraph is probably no more than a hopeful invitation to Finger to decide to proceed instead with some other party, and is not of great significance.

The final statement made by Mr Toole is that Karellas are prepared to continue negotiations. The adequacy of that offer is arguably undermined by the qualification that Karellas’ purpose in continuing negotiations would be to see if the proposed lease terms could accommodate the above matters, meaning both matters.

As I have recorded, it is Finger’s case that this letter, together with the earlier email sent by Vasilli Karellas, constituted a repudiation of the contract that was accepted by Finger, by its solicitor’s letter of 16 August 2010. Whatever the true meaning of this letter may be, that cannot be the end of the matter. Finger did not act to terminate the contract on the basis of the receipt of this letter. Further events occurred in the almost 9 weeks between the letter and the termination, that must be taken into account. The communications relied upon by Finger cannot be considered in isolation from later events. The meaning of the two communications could be tempered by later communications. As Finger did not immediately terminate, it lost the ability to do so solely having regard to the two communications.

The plaintiff's solicitor, Mr Reid, replied to Mr Toole’s letter on 11 June 2010, by a letter which was in the following terms:

Mr Reid began by noting Mr Toole’s advice that Karellas would not be proceeding with the lease “on the current proposed terms”. He observed that Karellas appeared to be prepared to proceed with the lease “but on negotiated terms favourable to” Karellas. Mr Reid then makes the operative statement: “We are instructed by our client that it is not interested in renegotiating the terms of the lease with your client”. The better view of the meaning of this statement, and the way it would most probably be understood by a reasonable reader, is that Finger’s position was that it would not renegotiate any of the terms of the formal documents in their then current draft form. That lack of interest would not be confined to the commercial terms expressed in the heads of agreement, but would include the additional covenants required by clause 17, and also the variations and additions that were not contemplated in the heads of agreement.

Mr Reid then makes the statement in relation to the “protracted and detailed negotiations”, and “the specifications for the building works to be carried out”, and that “final agreement was reached between our clients”. The statement that final agreement had been reached is close to being true, if “agreement” means agreement in principle. It is perfectly clear that any agreement that the parties reached was not final, in the sense that it was the subject of formal, executed documents. The statement is not entirely true in any event, at least in relation to final agreement concerning the specifications for the building works. I am not satisfied that the items that required attention, that were identified by Mr Briscas, had all been agreed, even in principle, and those items had not been incorporated into a final, agreed scope of works document.

Mr Reid’s statement concerning final agreement being reached reinforces the conclusion that his earlier statement that Finger was not interested in renegotiating the terms related to all of the current terms to the extent that they had been agreed in principle.

Plainly, Mr Reid did not state that Finger’s position was that the parties were obliged to enter into formal documentation containing the terms required by the heads of agreement, without any varied or additional terms. Finger’s position that it would not renegotiate any of the current terms was therefore inconsistent with the position that it has adopted in these proceedings, in that it has not alleged, and accordingly not proved, that the then current terms were binding on the parties, and its positive case is that the parties were obliged to enter into formal documents containing only the terms required by the heads of agreement.

The result is that, whether or not Mr Toole, in his 9 June 2010 letters, overstepped the mark in relation to his statement as to what Karellas were prepared to do (compared to the position that its contractual obligations obliged it to take), Mr Reid on behalf of Finger adopted a position that it was not contractually entitled to take. Finger was entitled to insist upon Karellas entering into formal documents that contained the commercial terms in the heads of agreement, but it was not then entitled to refuse to renegotiate other terms (probably including the covenants that clause 17 of the heads of agreement contemplated), especially the varied and additional terms. That conclusion does not rule out the theoretical possibility that Karellas’ conduct could have estopped it from refusing to proceed with the current terms, but that is not a case that Finger has sought to make.

I do not think that Mr Reid’s observations concerning the refusal of the Council to approve the use of trolleys are germane.

The assertions made by Mr Reid, in his fourth paragraph, concerning Karellas’ entitlements in relation to the future development of the Property, and, in his fifth paragraph, concerning Karellas’ investigations of the probable future turnover of the supermarket business, would appear to be reasonably justified. I have not noticed any evidence that Mr Reid was aware of the steps that Finger had taken to develop concept plans for the future residential development of the Property.

The final relevant statement made by Mr Reid is: “As you are no doubt aware your client’s withdrawal from the lease will result in our client incurring substantial losses”. In my view the assertion that Karellas had already withdrawn from the obligations imposed by the heads of agreement is an overstatement. The statements made on behalf of Karellas, in the 8 June 2010 email, and the 9 June 2010 letter, do not constitute an absolute refusal to perform the obligations in the heads of agreement. Those statements plainly indicate a refusal by Karellas to proceed upon the then current terms. It seems certain that Karellas’ aspiration was to achieve an outcome that would require it to pay a lesser rent than fixed by the heads of agreement. However, the statements should be considered in the terms in which they were made. They were limited to the then current terms, and were based upon two separate reasons. They were accompanied by an offer to continue to negotiate, albeit together with an indication that Karellas’ objective was to achieve a satisfactory result in relation to both problems.

Mr Toole then made his own response to Mr Reid’s 11 June 2010 letter, by his letter dated 21 June 2010. That letter stated:

First, in his second paragraph, Mr Toole denies that Karellas withdrew from negotiations for the agreement for lease and the lease. He notes that Finger has no interest in continuing the negotiations, and states the view that the negotiations had not been completed. Those statements are in substance correct. Whatever positions and aspirations Karellas had taken or expressed in the earlier correspondence, which strongly signalled the position that Karellas hoped to achieve, it had not withdrawn from the negotiations. Given the way Finger has run its case, the negotiations had not been completed. The statements made by Mr Toole in his second paragraph are also substantially correct.

In Mr Toole’s sixth paragraph, he acknowledges that the heads of agreement did refer to potential future development during the term of the lease. He then says that “it would appear that the nature of the potential redevelopment was not apparent to either party until recently”. Mr Toole then states that Karellas “certainly had no appreciation of the nature of the possible redevelopment of the Building that might occur during the term of the Lease until recently”. So far as Karellas are concerned, the evidence does not establish, in any positive way, that Karellas became aware of the development direction proposed by Finger up to this point in time. It is quite clear that Finger was aware of the nature of the potential development (accepting that the prospect was still conceptual and provisional). While no positive finding can be made as to what Karellas understood, it is not in any way improbable that Karellas’ observations of Finger’s efforts in relation to the ‘future proofing’ of the Property, and their contemplation of the strenuous efforts by Finger to achieve agreement on the terms of clause 13.11, caused them to focus on the risks to their supermarket business of Finger constructing some additional development, while Karellas tried to carry on their business.

Mr Toole then sets out the terms of clauses 15 and 17 of the heads of agreement, in the context of a statement that the heads of agreement emphasised the importance of the issue of future development to Karellas.

That is a statement of reliance by Karellas on the terms of clause 15, and in particular the requirement that is set out that: “It is essential for Karellas Group to understand the proposed development direction of this property for the future”. That statement was an implicit call upon Finger to provide the essential information necessary to provide Karellas with the required understanding.

In Mr Toole’s third last paragraph, he identifies clause 13.11 as being one example of the incomplete nature of the current arrangements between the parties. Even if Vasilli Karellas had expressed to Ben Finger his personal acceptance of that term, Karellas were entitled to seek legal advice concerning the appropriateness of their terms, and it would not be binding until it was included in the draft lease, and that document made a schedule to the executed agreement for lease. This statement made it clear to Finger that Karellas adopted the position that the terms of clause 13.11 remained to be settled.

Mr Toole then proceeds to assert that Karellas could not finalise clause 13.11, until it had reviewed “the Master Plan that is contemplated by the Heads of Agreement”. The proposition that the heads of agreement contemplate a master plan is clearly incorrect, and the heads of agreement do not oblige Finger to provide a master plan.

The next step taken by Mr Toole is to assert that, as Finger had obtained approval from the Council to the amendment of the current development, Karellas expected that Finger would be able to provide it with a detailed master plan for future development, of the Property. That statement goes too far, in that it does not follow from the fact that approval had been received for Finger’s s 96 application, that Finger would be in a position to provide a completed master plan.

Finally Mr Toole notes that Finger has no interest in continuing with negotiations of the terms of the lease. That comment is a reasonable reflection of what Mr Reid had said in his earlier letter.

Mr Reid then replied to Mr Toole’s letter on the following day, 22 June 2010. He said:

The statements made by Mr Reid in the third paragraph of his letter are justified so far as they go. They are true in so far as they focus on the issue of a master plan. It may be observed, however, that implicitly Mr Reid ignores that part of clause 15 set out in Mr Toole’s letter under reply, which made it essential for Finger to provide information to Karellas to let it understand the proposed development direction of the Property.

Mr Reid states: “We do not intend to engage in any further correspondence in relation to whether or not negotiations had been finalised”. That statement clearly pins Finger to the stance that it will not negotiate to depart from all of the then current terms of the draft formal documents, whether they be the commercial terms contained in the heads of agreement, the covenants required by clause 17, or any of the varied and additional terms that had provisionally been agreed.

That stance was not legally justified on the part of Finger. There were aspects of the current drafts as to which Finger had a contractual right to hold Karellas, but there were other aspects that did not bind the parties. On Finger’s case the parties only had an implied obligation to act reasonably to settle terms in accordance with the heads of agreement. Any varied or additional terms would not become binding, until included in executed documents. Furthermore, the contract was subject to the documents required by clause 22 being finalised, and those documents had not been finalised, because of the consequences of Finger making its s 96 application.

Mr Toole then wrote a further letter on 5 July 2010 in the following terms:

In his second paragraph Mr Toole advises Mr Reid that Karellas has accepted the position that Finger has ended all negotiations with Karellas, based upon Mr Reid’s statement that Finger did not intend to negotiate further in relation to the lease of the premises. Later, in his penultimate paragraph, Mr Toole reiterates that Karellas did not withdraw from the negotiations – Finger expressly terminated negotiations. In my view the position taken by Mr Toole was in substance justified.

Finger did not act to terminate the contract until 16 August 2010, when Mr Reid wrote the following letter to Mr Toole.

Mr Reid purported to terminate the contract, on the ground that the two pieces of correspondence relied upon by Finger indicated that Karellas were “not prepared to proceed with the proposed Lease on the terms set out in the heads of agreement dated 21 December 2009”.

A singular feature of this position is that Mr Reid asserts that Karellas had refused to proceed with formal documents on the terms set out in the heads of agreement, when it, in fact, had refused to proceed upon the current draft terms of the formal documents. Finger had taken the position that it would not renegotiate any of the current terms. Finger had not advised Karellas that Karellas were required to enter into formal documents containing only the terms required by the heads of agreement. Therefore, Mr Reid purported to terminate the contract on the basis that Karellas had taken a position that it had not taken, being a position that Finger itself had refused to negotiate towards. In that respect Mr Reid purported to terminate the contract on a ground that was inconsistent with the stance that he had taken on behalf of Finger in the earlier correspondence, after receipt by him of Mr Toole’s 9 June 2010 letter.

The primary argument put by Finger in its concluding submissions, was that, if the 8 June 2010 email and the 9 June 2010 letter truly conveyed that Karellas were not going to be bound by the commercial terms of the lease, as contained in the heads of agreement, they were repudiatory (T 141). Finger submitted that there was no available meaning that could be given to the communications, other than they meant: “We are not paying this rent” (T 133).

In its submissions Finger called in aid the statement made by Vasilli Karellas to Harold and Ben Finger on 31 May 2010, to the effect that Karellas had been working on a $13-$15 million turnover, and were shocked to learn that it may only be $7-$8 million. Finger did not plead reliance upon this statement. Finger submitted that, by a simple calculation, assuming about 25% gross profit, a reduction in forecast turnover of that magnitude would utterly wipe out any profit that Karellas could earn from the operation of the supermarket, even if the rent provided for in clause 9 of the heads of agreement were to be reduced to nought.

The statement that Finger pleaded, in par 13 of its statement of claim, that Vasilli Karellas made in his email was, relevantly, that “With this level of turnover and on the proposed lease terms the business is not viable for us”.

As stated above, I have not accepted that the pleadings permit Finger to rely upon the calculations (which were in reality ‘back of the envelope’ calculations), and I have not accepted that the calculations are sound. The distinction between Karellas making a statement, that would cause a reasonable person to understand that the proposed lease terms were not viable to Karellas, because the effect of the new turnover forecasts was that the business would operate at a loss even if no rent was payable, on the one hand, and Karellas simply making a statement, on the other hand, that the business would not be viable, may be subtle, but it is significant. What Finger pleaded, and what Karellas said, took the latter form. It was not specific as to the nature, and extent, or seriousness, of the lack of viability. It was by no means as strong a statement as Finger submitted.

Nonetheless, as I have said above, the statement should be taken at face value, and Karellas were moved to ask Finger to discuss the terms of the lease, because the forecast turnover resulted in the supermarket not being viable. That is a very serious statement to make, even if not precise as to the nature and extent of the lack of viability. A reasonable person would clearly draw the conclusion that Karellas aspired to securing a reduction in the rent.

It is necessary to begin with an analysis of the text of the correspondence written on behalf of Karellas, to consider their objective effect, in the light of the case pleaded by Finger.

Finger pleads that the combined effect of Vasilli Karellas’ 8 June 2010 email and Mr Toole’s 9 June 2010 letter was to repudiate the heads of agreement in the two ways set out in par 15 of the statement of claim.

First, Finger alleges that Karellas indicated that they were refusing to perform the contract according to their terms, by settling the terms of and then executing formal documentation containing terms and conditions as alleged in par 10(1).

Paragraph 10(1) describes the “terms and conditions” as being those “set out in the contract (with such variations or further terms as the parties might subsequently agree on)”. If par 15(1) and par 10(1) are read together literally, the relevant terms and conditions would not be limited to those required by the heads of agreement, but would include any varied or additional terms that had been agreed. However, it is not Finger’s case that Karellas were obliged to execute formal documentation containing the draft terms and conditions that were current as at 9 June 2010. In fact, in Mr Toole’s letter, Karellas clearly refused to enter into formal documentation on those current terms. Finger accepts that Karellas were entitled to take that course. Where, in par 15(1), Finger refers to the “terms and conditions as alleged in paragraph 10(1)” it intends only to pick up “the terms and conditions set out in the contract”; i.e. the heads of agreement. That is consistent with the basis upon which Finger terminated the contract by means of Mr Reid’s 16 August 2010 letter.

The first question, therefore, is whether Karellas refused to settle and then execute formal documentation containing the terms and conditions required by the heads of agreement. If it did so, then it repudiated the contract.

What Karellas in fact did was to refuse to proceed “on the current proposed terms”. That is what Finger alleges in par 14(1). That step, considered in isolation, could not be a repudiation of the contract.

The refusal is alleged in par 14(2) to be implied in the third paragraph of Mr Toole’s letter, where five things are said. Those things are pleaded in sub-pars (a) to (e): being; there was no executed agreement for lease; the terms of the lease were still being negotiated; the heads of agreement did not include all of the intended lease conditions; there had been “significant changes” to the terms contemplated by the heads of agreement; and a number of “important matters” had not been discussed as at December 2009.

It follows from the findings that I have made above; first, that Mr Toole’s letter did make all of those statements; and secondly, they were all true.

Did the making of all of those true statements imply that Karellas refused to enter into formal documentation containing only the terms and conditions required by the heads of agreement? I do not accept that that implication can be drawn. It does not follow from the fact that Karellas stated that it would not proceed on the then current terms and conditions, and it also made the five true statements about the current legal and factual position concerning the implementation of the heads of agreement, and the extent to which the heads of agreement did not comprehensively specify the necessary terms and conditions, that Karellas by implication would not cooperate in the exercise of determining the terms and conditions that were required by the heads of agreement.

That conclusion is justified on the basis of an analysis of the words used by Mr Toole, without having regard to the context. The conclusion is reinforced manifold by a consideration of the context, as it must have been evident to both Finger and Karellas in June 2010. The bargain that the parties contemplated they would implement at that time was substantially different to that which was inherent in the heads of agreement. It is difficult to divine how the parties would have seen the heads of agreement at that time, or what they would have thought about the legal and practical considerations involved in any attempt to revert to terms and conditions as required by the heads of agreement. As a single example, it is only necessary to advert to the difficulty that may have flowed from reversing Finger’s s 96 application. It would be dangerous to conclude that Mr Toole’s letter contained any clear implication about Karellas’ attitude to the implementation of the heads of agreement as originally agreed.

Furthermore, Finger’s case on its first ground of repudiation by Karellas ignores its own conduct in the period that intervened between Mr Toole’s 9 June 2010 letter and Mr Reid’s 16 August 2010 termination letter. In short, Finger adamantly refused to renegotiate the current terms of the proposed agreement for lease and lease. It does not lie in Finger’s mouth to claim that Karellas repudiated the heads of agreement by refusing to revert to the terms and conditions required by the heads of agreement, when Finger itself point blank refused to engage in the further negotiations that were necessary for that outcome to be achieved.

I add that, if, as I have found, the heads of agreement contained an implied term that required the parties to cooperate reasonably, in various limited ways, to settle the necessary formal documentation, and if Finger’s position was that Karellas were obliged to take all of the steps that then would have been necessary to revert to the terms and conditions originally required by the heads of agreement, it was incumbent upon Finger to say so, and then itself to cooperate in the process. Finger’s refusal to renegotiate the then current draft terms prevented the outcome that it now seeks, in essence, to enforce.

The second basis of repudiation pleaded by Finger, in par 15(2) of the statement of claim, is that Karellas indicated that they would perform the contract only if and to the extent that it suited them to do so, that is, not with a view to settling terms of formal documentation in accordance with the heads of agreement, but rather with a view to negotiating commercial terms more favourable for themselves than those agreed to in the contract.

This is a more persuasive ground than the first, because of the statements made in Mr Toole’s letter concerning Karellas’ reasons and objectives. The reasons are correctly pleaded in par 14(3) as being; first, a concern about the impact of future development of the site on the supermarket business; and secondly, the effect of the significant reduction in forecast turnover of the supermarket business.

I have already noted that a reasonable person in the position of Finger in the context would understand that the second reason given by Karellas implied that Karellas had a pressing need to secure a reduction in the agreed rent, and perhaps a variation of other terms to reduce the operating costs of the proposed supermarket.

As pleaded in par 14(4), Mr Toole did say that Karellas were willing to continue negotiations, but he qualified that statement of willingness by appending two objectives: being; first, to see if a suitable outcome could be achieved for both parties; and secondly, to see if the proposed lease terms could accommodate both of the concerns set out in par 14(3).

I do not accept that the first of these objectives; being to see if a suitable outcome could be achieved for both parties, was sufficiently explicit to constitute a repudiation of the heads of agreement.

However, the second of the objectives is capable of having the meaning: Karellas are prepared to renegotiate the currently proposed terms to see if new terms can be agreed that satisfy Karellas’ concern about “the above matters”; being the impact of future development, and also Karellas’ concern about the effect of the substantial reduction in the forecast turnover. The expression “to see if” conveys the meaning that Karellas were prepared to negotiate further, but if the process did not lead to the desired accommodation, it would miscarry because Karellas would not then proceed. The use of the expression “the above matters” refers to the two concerns collectively, one of which (covenants concerning the consequences of further development) Karellas were entitled to renegotiate under the heads of agreement, and the other of which (the rent) was fixed by the heads of agreement.

In so far as the conclusion to be drawn rests upon an expression as brief as “to see if”, the proper result is finely balanced. The Court should be careful when considering the possibility that the injudicious choice of a few words has invited the dramatic consequences that may flow from the repudiation of the contract. But the Court must assess the meaning of those words within the text, and also with regard to the context. The question is how a reasonable person in the position of the other party would understand the language used. If a contract is repudiated, the other party must make a momentous choice; whether to terminate the contract, or affirm it. It is the contemporary effect of the communication that is paramount; which will not necessarily be the same as that which emerges from an extensive perusing of the words used in the courtroom. The revelation by Karellas of its misjudgment of the forecast turnover was potent. Karellas responded to Ben Finger’s 8 June 2010 email with their solicitor’s letter of the following day. That letter was peremptory in tone. Karellas’ refusal to proceed on the basis of the then current draft terms encompassed the commercial terms in the heads of agreement, as well as later variations and additions. The issue of the rent would have been at the forefront of the reasonable reader’s mind. The reason for the dramatic escalation of the dispute by Karellas would not have been evident, if it were other than to secure a reduction in the rent. In these circumstances, the second objective identified by Mr Toole would have conveyed to the reasonable reader of this letter that Karellas would negotiate further, but only if that secured its objective of accommodating the difficulties caused by the forecast shortfall in turnover.

It follows that, if Finger had terminated the heads of agreement on the basis of the statements made in Mr Toole’s 9 June 2010 letter, that termination would have been valid, subject to the separate issue of whether Finger was precluded from terminating the contract because it was itself in breach, a question that I will consider below.

However, Finger did not terminate the heads of agreement before further correspondence took place between the two solicitors. As I have noted, Finger adopted the adamant stance that it would not renegotiate the current terms. The evidence satisfies me that Finger’s position at the time was that it was entitled to require Karellas to proceed on the basis that the formal documentation would incorporate the terms that the parties had negotiated to that point. That stance is inconsistent with Finger’s case in these proceedings. Finger has apparently appreciated that it could not sustain a case of repudiation based upon Karellas’ refusal to enter into formal documentation containing the then currently negotiated terms and conditions. It has pleaded a different case, but it cannot change the effect of its own conduct at the time.

At the date of Finger’s purported termination of the contract on 16 August 2010, the position was as follows. First, Finger had a right under the heads of agreement to hold Karellas to the rent, and the other commercial terms, set out in that document. Secondly, Karellas had a right to adjust their position in relation to the clause 17 covenants, and the other documents required to be prepared for the purposes of the reconstruction of the Property, particularly in relation to the consequences of the future development of the Property. Thirdly, Karellas offered to renegotiate the current terms, but only if their two concerns could be accommodated; one of which was legitimate, and the other was not. Fourthly, Finger had refused to renegotiate any of the current terms. That meant that Karellas were refusing to proceed, except if further negotiation accommodated their concern on the turnover issue. It also meant that Finger was refusing to proceed to renegotiate matters that Karellas were entitled to require the parties to revisit.

What is the effect of the position that, by 16 August 2010, each party had in effect adopted the position that it would not renegotiate the current provisionally agreed terms? That was so in Karellas’ case because they had offered to renegotiate, but only on an illegitimate basis. It was so in Finger’s case because Finger had refused to renegotiate at all, when Karellas were entitled to a renegotiation, if only in respect of one of their concerns. The actions of both parties took effect at the same time. As at 16 August 2010, there was a stand-off. Out of the blue, Finger terminated the contract on the ground that Karellas had refused to renegotiate the currently agreed terms, to settle formal documentation as required by the heads of agreement. Putting entirely to one side all of the practical and legal difficulties in moving from the current position to that contemplated by the heads of agreement, the fact was that, as at 16 August 2010, terms and conditions as contemplated by the heads of agreement were not on the table. The act of repudiation that should be implied from Mr Toole’s 9 June 2010 letter had, in my opinion, ceased to be operative, or to have the practical effect that it initially had. The offer by Karellas to renegotiate, but only on an impermissible condition, ceased to have any meaning while Finger refused to renegotiate on any basis. Finger could not effectively terminate the heads of agreement for repudiation by Karellas, on the ground that Karellas would not settle the formal documentation required by the heads of agreement, without Finger first making an offer to Karellas to participate in a renegotiation intended to achieve that result.

I find that Finger did not validly terminate the heads of agreement on the basis of a repudiation of that contract by Karellas.

I have reached that conclusion having regard to the combined effect and meaning of the conduct of both of the parties. However, the conclusion may be supported by the argument that, as Finger has succeeded in its claim that the heads of agreement constituted an enforceable contract, that obliged the parties to cooperate reasonably to settle the terms of the formal documentation contemplated by the heads of agreement, it follows that Finger itself was under an obligation to negotiate with Karellas to achieve that result. As at 16 August 2010, Finger’s adamant position was that it would not renegotiate any of the then current proposed terms, including those that concerned subject matters that remained open for negotiation at Karellas’ insistence. Finger itself was not ready and willing to perform the contract, and its own position was one of repudiation. It was therefore not entitled to terminate the contract.

I have found above that Finger breached clause 15 of the heads of agreement, by failing to inform Karellas of the substance of its plans to redevelop the Property to add a residential level on the first floor. There is a question as to whether, if Finger’s termination of the heads of agreement on 16 August 2010 would otherwise have been valid, Finger was precluded from terminating the contract because it was in a state of breach.

The answer to that question depends upon whether clause 15 was an essential term of the contract, or whether the breach of clause 15 was otherwise sufficiently serious to justify Karellas terminating the contract for breach by Finger. I have reached the conclusion that Finger was not entitled to terminate the contract, while it was in breach of clause 15. I base that conclusion in part upon the use of the word “essential” in the clause. If the parties agree that performance of a particular term is essential, the Court should be disinclined to find otherwise. However, in addition, there are substantial reasons why it should be found that compliance by Finger with the requirements of clause 15 was essential. In the manner that I have discussed above, the effect of clause 1 was that the parties proceeded upon the basis that Finger would not depart from Revision C, and clause 17 contemplated that the lease would contain covenants that afforded Karellas an appropriate level of protection from any additional redevelopment of the Property by Finger. If Finger departed from Revision C in any material way after Karellas executed the agreement for lease, Karellas might lose the protection that clause 1 was intended to give them. That would be so unless the agreement for lease, and the lease, happened to contain covenants that preserved Karellas’ clause 1 rights. In practical terms, that required that Karellas have knowledge of Finger’s future development intentions, before Karellas bound themselves to the terms of the agreement for lease. It is true that Karellas agreed to delete from the heads of agreement that part of the original wording of clause 15 that would have required Finger to provide a complete master plan for any future development, before the agreement for lease was signed. However, it does not follow that the residue of clause 15 was inconsequential. Karellas agreed to accept an entitlement to be provided with less definite information than a master plan, but it is obvious that knowledge of what Finger proposed to do in the future was of prime importance to Karellas, in deciding the terms upon which it should enter into the agreement for lease; and, crucially, whether any aspect of Finger’s plans would involve a material departure from Revision C.

Clause 15 imposed a positive obligation on Finger to provide the required information to Karellas, before Karellas were obliged to execute an agreement for lease.

I acknowledge that there is an argument available to Finger that, at least in the period up to 9 June 2010, Finger was not in breach of clause 15, because Karellas did not ask Finger to provide to it the information required by that clause. There is a basis in the evidence for a conclusion that Karellas willingly participated in the negotiation of clause 13.11, and related provisions, which were intended to protect it in relation to whatever redevelopment Finger might subsequently decide to undertake. There is no evidence that Karellas asked Finger to provide it with the information required by clause 15 as part of that process. However, if there is strength in that argument, it only obtains up to the time when, on 21 June 2010, Mr Toole referred to the issue of the potential redevelopment of the Property and said: “The Heads of Agreement also emphasised the importance of this matter and associated issues to our client as it included the following paragraphs”. Mr Toole then set out the terms of clause 15 and clause 17. It is true that Mr Toole overstated the effect of clause 15, in so far as he claimed that Karellas could require Finger to provide a copy of its master plan. However, it is the case that by this letter Karellas required Finger to comply with clause 15. It did not do so.

As I have found that Finger has failed to establish that it validly terminated the heads of agreement on the ground of repudiation by Karellas, Finger’s claim in these proceedings must be dismissed.

If that course is correct, then the issue of the quantification of the damages to which Finger would have been entitled does not strictly arise.

However, it must be accepted that the issue of whether or not Finger validly terminated the heads of agreement is contentious. The parties fought the issue of the quantum of damages; albeit, as will be seen, in a somewhat simplistic way. A significant number of issues were contested by the parties. Finger would have it that the quantification of its damages is a very straightforward matter. I disagree. In my view, it is a difficult matter to make a proper judgment as to the true amount of damages to which Finger would have been entitled, if it had succeeded on the issue of liability.

It is an onerous exercise for the Court to deal with all of those issues, given the finding that has been made on liability. Nonetheless, it will be necessary and appropriate for the Court to deal with at least the principal issues that were in contest between the parties, so that the parties will have findings of the Court in respect of those issues, should the question of the quantum of damages be re-enlivened.

I will not in the reasons for judgment make a precise finding as to the amount of damages that I would have awarded to Finger, if I had found that Finger had validly terminated the contract. The principal reason is that, had I found it necessary to determine quantum, I would have taken the exceptional course of recalling the parties and requiring them to make additional submissions in order to assist me with the exercise. Finger sought to quantify its loss on the simple basis that it lost the benefit of the lease to Karellas, essentially containing the terms that were current in June 2010. Finger also asserted that the substantial profit that it made from the residential redevelopment of the Property, before its lease to Woolworths Limited (‘Woolworths’), as the replacement tenant for Karellas, commenced, should simply be ignored. I consider that Finger has asked the Court to determine its loss on incorrect principles. Once the real issues are understood, a shower of difficult questions emerges. They give rise to the issue of how to deal with inadequacies in the evidence; issues concerning the operation of the burden of proof, and countervailing obligations to adduce evidence; and the possibility of double counting or omission of elements relevant to the computation of damages. The Court should have the assistance of the parties before engaging in that exercise

On 16 May 2011 Finger entered into an agreement for lease with Woolworths.

Clause 3 obliged Finger, in substance, to carry out the work necessary to construct a supermarket by an anticipated completion date of 1 June 2012, in accordance with identified plans and specifications, and a development approval that allowed Woolworths to use the premises for the use permitted by the proposed lease, and also permitted both Finger and Woolworths to undertake the works contemplated by the agreement for lease.

The draft lease that was schedule 4 to the agreement for lease contained in clause 12.12 a term that permitted Finger to construct future developments on the Property “strictly in accordance with the details shown on the Master Plan”. The master plan was schedule 6 to the draft lease. It appears to be a two-page document consisting of plans of level 1 and level 2 for the development of 20 residential units above the ground floor of the Property.

The evidence includes an approval given by the Council, under s 96 of the Environmental Planning and Assessment Act 1979 (NSW), dated 16 May 2011 (which is the same date as the agreement for lease was executed) for the construction of 20 residential units above an approved grocery store.

The approved drawings include plans of level 1 and level 2 of the residential development, which are consistent with, although not identical to, the drawings in the master plan that formed a schedule to the proposed lease.

The approved section drawings (Ex A 4375) appear to show that the residential units would be constructed on a slab over the whole floor area of the Property (albeit not at a uniform level).

In so far as Revision C only showed a Bondeck slab over the trading and back office area, the residential development actually constructed by Finger was inconsistent with Revision C to that extent.

While the comparison must be one of impression, and the relationship between the two plans is not easily put into words, in my view, the plans of the residential units that were approved by the Council (Ex A 4371 and 4372) appear to be an evolution of the drawings prepared for Finger on 24 June 2010 (Ex A 3653 and 3654). The proposed mezzanine residential units in the latter have been omitted (Ex A 3652). There appear to be only 17 residential units in the 24 June 2010 plans, as four of the proposed units appear to be significantly larger than the remainder.

Finger obtained approval from the Council on 30 August 2011, under s 96, for the construction of the supermarket to be leased to Woolworths.

Karellas prepared and tendered (Ex 3) the approved plan for the Property that had been prepared for the purpose of constructing the supermarket that was intended to be leased to Karellas, upon which had been superimposed in red the major relevant components of the equivalent approved drawing, that was used by Finger to construct the supermarket that was actually leased to Woolworths. As I understand it, the plan for the Karellas supermarket takes into account the changes to Revision C that were agreed by the parties in the course of the preparation of the draft agreement for lease, and the draft documents contemplated by clause 22 of the heads of agreement.

Exhibit 3 shows a number of changes between the two approved plans. First, in the case of the Karellas plan, Finger only had one means of gaining access to the first floor, for the purpose of any future development (by exercising the right contemplated by clause 2.2 of the agreement for lease to excise 22 m², at a date 3 years or more after the commencement of the lease), whereas the Woolworths plan gave Finger three separate means of access to the first floor. First, there was the original area (apparently changed in dimension, and possibly with a smaller floor area). Secondly, a new entry way containing a stairway and lift had been provided for on the Gowrie Street side of the Property. Thirdly, there was a fire stair within the car park in the middle of the frontage of the Building to Railway Lane. In relation to this fire stair, Revision C made provision for a fire stair at a different location within the car park, but the drawings show that that stairway was to give access to a mezzanine level above the car park, and a plant room that was to be constructed on the roof.

The trading and back areas in the Woolworths plan are smaller in floor area than in the equivalent Karellas plan, primarily because of the area in the former, to be used for the stairway and lift to the upper floors, has been excised from the trading area in the latter. (Both plans provide for a mezzanine level in the back office, which is different from Revision C).

The layout plan for the trading area of the Woolworths supermarket (Ex A 4180) shows that there were eight structural columns situated within the trading area on a rectangular grid, and that all of the columns were situated within the aisles or other parts of the trading area, and not within Woolworths’ gondolas.

A revised build programme circulated by Ben Finger to Woolworths, on 23 December 2011 (Ex A 4108 and 4109), shows that Finger proposed to construct both the supermarket premises and the residential development as part of the one construction project, and to hand the supermarket over to Woolworths after practical completion of the whole project. Ben Finger agreed in cross-examination that the residential development was completed before the commencement of the lease to Woolworths.

The evidence suggests that the handover date under the agreement for lease, at which Finger gave possession of the supermarket to Woolworths, was 8 March 2013, or thereabouts.

Finger was therefore able to complete its residential development by on or about 8 March 2013. If it had entered into a lease with Karellas containing the term required by clause 2.2 of the agreement for lease, Finger could not, practically speaking, have commenced to construct any residential development on the Property, until at least 3 years after the commencement of the lease, which would be a date after Finger had completed the construction of the supermarket to be leased to Karellas. If, choosing a date of 1 January 2011 for the commencement of the lease to Karellas (for the sake of illustrating the point), Finger could not have commenced constructing the residential development until 1 January 2014.

Exhibit 2 tendered by Karellas contains a number of photographs, that were taken during the course of the project to construct both the supermarket and the residential units. Most of the photographs appear to have been taken from the street. They show that the property was surrounded by scaffolding and a hoarding (in a manner that is commonly seen), and confirm that the project was undertaken without a supermarket being operated from the supermarket premises.

Ben Finger accepted in cross-examination that, in gross terms, Finger received about $11 million from the sale of the 20 residential units (T 90). The cost of building and development was about $4.7 million. Asked whether that meant that Finger had made a profit of in the order of $5 million, Ben Finger rejected the suggestion, because it did not apportion any of the cost of the original acquisition of the Property to the residential component of the development. However, it appears that Finger had incurred the cost of purchasing the Property before June 2010, and the fact of its being able to complete the 20 residential unit development had the result that it enjoyed a net gain of an additional amount of approximately $5 million, that it would not have received, if it had not been able to complete the residential development.

Karellas made no complaint about the conduct of Finger in negotiating the rent that Woolworth agreed to pay, which was less than Karellas had agreed to pay in clause 9 of the heads of agreement. The evidence shows that Finger tried to negotiate a higher rent than it ultimately achieved, and explored the possibility of an alternative substitute tenant to Woolworths.

The draft lease, that became schedule 4 to the agreement for lease between Finger and Woolworths, provided for a term of 15 years from a commencement date to be fixed in accordance with the agreement for lease. The base rent was $510,000 per annum, and the lease provided for the possibility of an additional turnover rent. Woolworths was given eight options to renew for five years each.

Finger asked the Court to assess its damages on the basis that would ordinarily be appropriate if Finger and Karellas were parties to an agreement for lease, which required Finger to construct a supermarket, and then for the parties to enter into a lease of the supermarket for an agreed period and on agreed terms.

Finger superseded the particulars of damages given in its statement of claim with schedules that were handed to the Court during final submissions.

There were two components of the claim. The first was the net present value of the difference between the income streams that Finger would have enjoyed, if Karellas had performed their obligations under the heads of agreement, and those which it has enjoyed, or will in the future enjoy, under the Woolworths lease. The difference between the two sums of $6,704,021 (Karellas) and $4,461,962 (Woolworths) is $2,242,059. Finger used a discount rate equal to the 10 year bond rate issued by the Reserve Bank of Australia.

The second component of Finger’s claim was an amount that totalled $1,050,840, which was the sum of a number of items (legal costs, agent’s fees, consultants’ costs, fit-out costs and the like) for which Finger incurred expenses in respect of the Woolworths lease that were greater than would have been incurred had Karellas performed its obligations under the heads of agreement.

The total amount of Finger’s claim is therefore $3,292,899 (subject to a small reduction to which I will come below).

Karellas did not in their submissions challenge the calculations upon which Finger’s damages claim is based. It did not seriously challenge the discount rate used by Finger. I have carried out a broad review of the evidence, which appears to substantiate the individual components of the damages claim.

I will proceed upon the basis that, if Finger had succeeded on the issue of liability, it would have been entitled to $3,292,899 (subject to the small adjustment) as damages, if the principles upon which it has calculated its damages were correct.

Karellas attack the basis upon which Finger has calculated the amount of the damages that it has claimed.

In par 1(u) of their defence, Karellas plead a defence that is directed to the issue of the damages suffered by Finger. Karellas allege:

Finger’s response to Karellas’ claim that in calculating any damages payable to Finger, Karellas should be given credit for the profit that Finger received from the residential development that it implemented, was (T 218) that what Finger did to develop another part of its land other than the leased premises had nothing to do with the loss of income from the lease. It was just a different transaction that may or may not have gone ahead. Finger may or may not have made a profit. Finger may have done something else altogether, than further develop the Property. Those possibilities did not affect Finger’s rights in relation to the part of the Property that constituted the Premises, that was going to be leased to Karellas.

In Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464 Hargrave J set out the following statement of principle concerning the assessment of damages, which I respectfully accept (citations omitted):

Sackar J in Fishlock v Campaign Palace [2013] NSWSC 531 considered at [273] the relevant principles in the context of the repudiation of a contract. His Honour also considered, at [276], another question that may be relevant to the determination of these proceedings, being how damages should be determined when the party in breach would, had the contract not been breached, have had a number of alternative ways of complying with its obligations. His Honour said:

Another question of principle that arises in the present case concerns the dispute between the parties as to whether or not Finger must bring to account the profit it made from its residential development of the Property in determining the amount of any damage that it has suffered. The parties did not address submissions to the question of the principles that the Court must apply, in determining whether a profit earned by a plaintiff, following a breach of contract by a defendant, must be brought to account in determining the damage caused by the breach of contract. Karellas did, however, properly rely upon the decisions of the Court of Appeal in Carpenter v McGrath (1996) 40 NSWLR 39, and Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248; (2008-2010) 75 NSWLR 1, in which the Court of Appeal restated the general proposition that a plaintiff entitled to receive damages is only entitled to its net loss caused by the breach, after taking into account any benefit received by the plaintiff consequently upon the breach. Nor did they grapple with the issue of how those principles should be applied in the circumstances of the present case.

This question was considered at length by Giles JA in Ruthol Pty Ltd v Tricon Australia Pty Ltd [2005] NSWCA 443 at [38] to [51]. Santow JA and Hunt AJA agreed with his Honour’s reasons at [70] and [71]. The principles identified by his Honour appear from the following extracts of his reasons (which omit significant aspects of his Honour’s consideration of the authorities):

In Fenridge, Hargrave J was concerned with a claim by a lessor for breach of a lease by the lessee in failing to keep the leased premises continuously open for business as a private nursing home during the currency of the lease, and to deliver up the premises to the lessor at the end of the lease in as good order and condition as they were in at the commencement of the lease. As a result of the alleged breach, the lessor could not continue to use the land for the purposes of the operation of a nursing home. The lessor redeveloped the property, and made a profit. One question before the Court was whether the damages payable for breach of the lease should be reduced by the amount of the profit that the lessor made from the redevelopment of the land following the breach. Hargrave J considered the submissions of the parties, and analysed the relevant authorities in detail at [305] to [336]. I have therefore edited his Honour’s reasons to focus on the aspects of the reasons that are of more general application. His Honour said (omitting footnotes):

The question is whether, if the party who has suffered a breach of contract obtains a compensating advantage from its response to the breach, that advantage should reduce the loss for which the party in breach must give compensation. That depends upon whether the advantage is “collateral” to the breach, or “indirect”. Those terms are descriptive, but only serve to illustrate the reality that the determination requires the exercise of judgment by the Court, in the sense discussed by their Honours. Does the compensating benefit arise out of the transaction, following the breach, in a manner that justifies the conclusion that the consequences of the breach encompass both the benefit enjoyed by, and the loss suffered by, the innocent party? That question is best approached having regard to the whole of the facts of the particular case, rather than as a theoretical exercise.

As I have observed above, Finger claims that its damages should be assessed on the basis that, if the heads of agreement was terminated because of Karellas’ repudiation, it lost the benefit of an agreement for lease, and then a lease, containing the terms that had provisionally been agreed up to June 2010.

Finger dealt with the issue that the heads of agreement was subject to conditions, that had not finally been satisfied by the date of termination, by submitting (T 197); first, that as a matter of fact the conditions that had to be satisfied were satisfied; and secondly, that, even if the conditions were not satisfied, then the effect of Karellas’ repudiation was that those conditions are taken to have been satisfied, and damages are awarded on the basis that there was a complete contract in the terms of the heads of agreement.

Finger relied for this second proposition on the following statement of principle by McHugh JA (as his Honour then was) in G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 637 (Kirby P and Glass JA agreeing):

The principle stated by McHugh JA would clearly prevent Karellas being entitled to say that the heads of agreement ceased to be enforceable, because the formal documentation that it required the parties to execute had not been executed by 21 December 2010, so that Karellas had an entitlement under clause 22 to terminate the agreement as at that date. The failure of the parties to satisfy the condition would have been caused by Karellas’ repudiation of the contract.

It does not, however, in my view follow, that the decision in G R Securities has the effect that all of the steps that the heads of agreement required the parties to complete, that had not been completed by the date of termination, should be treated as having been completed in the manner that would entitle Finger to damages as if the agreement for lease, and the lease, contained all of the terms that had been provisionally agreed by June 2010. It remains necessary for the Court to determine the position that Finger would have been in, if Karellas had performed their obligations under the heads of agreement, as the paramount rule is that the damages to which Finger is entitled must be measured by the difference between that position, and the position that Finger is actually in as a result of the breach.

Finger was occasionally tempted to try to solve certain forensic problems by asserting that, by June 2010, all of the conditions had been satisfied. They had not, in fact, been satisfied, and the proposition that Karellas were bound to enter into an agreement for lease, and a lease, on the terms that the parties had provisionally agreed, as at June 2010, was inconsistent with the case that Finger put during the hearing. Finger’s case was that, if the parties could not agree on varied and additional terms, they had to enter into formal documentation in the terms that were contemplated by the heads of agreement. At the date of termination, the parties had not addressed the issue of what those terms should be. In fact, Finger had refused to enter upon any renegotiation of the provisionally agreed terms. G R Securities may prevent Karellas from asserting that any conditions have not been satisfied, or would not have been satisfied. The case does not obviate the need for the Court to determine how those conditions would have been satisfied, if the repudiation had not occurred.

As I have said, I am satisfied that Finger has proved it is entitled to damages of $3,292,899, provided that its damages are to be calculated on the basis of the principle for which it contends.

There is one qualification to my acceptance of Finger’s calculation that will require a reduction in the amount claimed. In submissions, Finger acknowledged that it had overstated the rent that it would have received from Karellas, as in order for Finger to construct the residential development that it in fact constructed, it would have had to excise the 22 m² in area referred to in Revision C, in accordance with the terms of the draft lease, in order to be able to construct one of the access stairs to the residential level. Consequently, if the lease to Karellas had proceeded, there would have been a pro rata reduction of the rent payable in the proportion of 22 m² to the total net lettable area. That calculation has not been done, although in submissions Finger offered to provide it. If an award of damages is to be made in favour of Finger, then the damages will have to be adjusted to make that allowance.

Apart from this concession, Finger’s claim for damages proceeds upon the basis that, if the heads of agreement had not been terminated on the grounds of its repudiation by Karellas, the parties would have entered into an agreement for lease, and then a lease, on the terms that the parties were provisionally agreed upon at the time of the termination. (For example, Finger included in its calculation of the rent payable by Karellas, the $55,000 per annum payable in respect of the mezzanine area in the back office, on the assumption that the mezzanine area would have been constructed). Finger rejected the proposition that its claim should be reduced, to deal with the consequences of any other terms of the lease, that would have reduced the overall monetary return to Finger.

On the liability issue Finger accepted that in June 2010, when Karellas refused to enter into an agreement for lease on the then currently proposed terms, Karellas were lawfully entitled to take that course. Finger has then calculated its damages on the basis that, had the heads of agreement not been terminated, Karellas and Finger would in fact have entered into an agreement for lease containing those currently proposed terms.

This approach is fundamentally inconsistent with that which was advocated by Karellas in submissions. Karellas submitted that, even if the heads of agreement was a final and binding contract, that was terminated by Finger because it was repudiated by Karellas, the parties had not at the time of termination executed the formal documentation, or finally agreed its terms, so that in legal reality all Finger lost was the chance that the parties would finally agree upon terms before 21 December 2010, and then execute the formal documentation. Karellas submit that damages should be assessed by measuring the value of the chance lost by Finger. Karellas submit that, in the events that happened, the value of the chance is nil. I will return to this argument below.

It will be convenient, in order to treat the different strands of the damages claim and Karellas’ response separately, to start with a consideration of what, on the probabilities, would have happened in fact, if the heads of agreement had not been terminated, and the parties had entered into an agreement for lease, and a lease, in the terms that were provisionally agreed at the date of termination. For the moment, therefore, I am assuming, but not deciding, favourably to Finger, that notwithstanding Karellas’ refusal to proceed on the currently proposed terms, it would have done so. I will deal with these issues in the order of the relatively more obvious, to the relatively less obvious.

First, as Finger has acknowledged, as it carried out the residential development on the first floor, the rent would have been reduced proportionally at some date, following the excision of the 22 m² from the trading area.

Secondly, it is clear that the premises leased to Woolworths are less in net lettable area than were proposed to be leased to Karellas, because of the additional excision of the area used for the lobby, stairway and lift. Ordinarily, the gross rent payable by a commercial tenant will be proportional to the net lettable area. In principle, for the purpose of determining damages payable to Finger, an appropriate adjustment should be made to allow for the reduction in the rent that Finger will receive from Woolworths that is proportional to the reduction in the net lettable area of the premises leased to Woolworths, when compared to that which was to be leased to Karellas. The evidence does not appear to establish clearly the net lettable area of both premises. (Some idea of the difference can be derived from Finger’s 24 June 2010 residential scheme, whereby the trading area was reduced from 707m2 to 677m2).

Thirdly, the excision of the 22 m², and the commencement of the construction of the residential development, would have been delayed for at least three years after the commencement of the lease to Karellas: clause 13.10 of the draft lease. There may have been an issue as to whether the restriction on Finger excising the 22 m² until three years after the commencement date, would also prevent Finger from commencing the construction of the residential development until the same time. It may have been arguable that Finger could have commenced the construction of the development, and then only excised the 22 m² at the end. There is no need to consider this matter, as Finger submitted on a number of occasions in final submissions that the residential development could not have been started until after the three-year period elapsed (T 205, 207, 208 and 218). In fact the residential development was completed by 8 March 2013, when the supermarket was handed over to Woolworths. It is not clear what the commencement date of the lease to Karellas would have been, but for the purpose of exposition one might reasonably adopt 1 January 2011 (which is probably a date favourable to Finger, given the obvious possibility of delay in the construction of the supermarket for Karellas). Had the lease to Karellas proceeded, then Finger could not have started to construct the residential development until 1 January 2014. Consequently, it would have received the profit from the sale of the residential units a considerable time after the dates when it did from the sale of the units that were constructed before the commencement of the lease to Woolworths. The early receipt of the profit was a benefit to Finger, which it derived as a result of the termination of the heads of agreement, and which is capable of being calculated, although there was no evidence on this issue before the Court

Fourthly, the combined effect of clause 13.10 (excision of the 2.2 m² and the making good of the trading area) and clause 13.11 (alterations to the building) of the lease to Karellas, would have been that, during the construction period, and for a time thereafter (determined by the provisions of the lease), the rent payable by Karellas would have been reduced to 2% of the annual turnover of the business for the preceding financial year. Finger’s attitude to this issue in submissions (T 212), was that the issue should be ignored, because there was no positive evidence to establish that during the construction period “this would have been triggered with a 5% reduction in turnover”. This argument, with respect, appears to be misguided, because the reduction in rent did not depend upon the occurrence of a 5% reduction in turnover trigger. Both clauses provide for an automatic reduction in rent to 2% of turnover (and clause 13.11(b) is an acknowledgement by both parties that the construction would have “a material adverse affect (sic) for the Tenant’s Business”). It is true that there was no evidence about what the turnover of Karellas’ supermarket business would have been (and there is no sensible way that such evidence could have been produced). Nonetheless, the reduction in rent would most definitely have occurred, if Finger implemented its residential development proposal. (Perhaps calculations could have been made – for want of better evidence – using the turnover forecasts).

Fifthly, clause 13.11(a) would have reserved to Finger the “right… to enlarge, alter or reduce the Building (other than the Premises, subject to the Landlord’s rights in relation thereto under this Lease) and to carry out construction or demolition works in any part of the Building (other than the premises)”. Clause 13.10 gave Finger a right to reduce the Premises by excising the 22 m². Otherwise, the draft lease did not give Finger any right to alter the Premises. It is therefore clear that Finger could not have constructed the residential development, which it in fact did construct, without Karellas’ consent. That flows from a comparison between the approved plans for the Karellas and Woolworths supermarkets that I have set out above. In constructing the Woolworths supermarket, Finger excised an additional area to construct a lobby, an extra set of stairs, and a lift for the benefit of the residential development on the first floor. It is improbable that Karellas would have given their consent, given that their supermarket would have been in operation, and the additional building work would have been extremely disruptive. If Karellas had given their consent, it would only have been for a substantial consideration.

Ben Finger conceded in cross-examination that the Council required that there be at least two fire escapes, that were appropriately separated (T 59 and 60), although he asserted that Finger could have provided the two required fire escapes by using the 22 m², and constructing an additional fire escape in the car park. The residential development as constructed actually had three separate fire escapes.

The question then becomes whether Finger could have constructed an equivalent residential development, without impinging upon the premises leased to Karellas, in a way that would have breached the lease. Finger provided no evidence to support this proposition. Ben Finger asserted in cross-examination that it would have been possible. Finger claimed in submissions that it would not have been difficult to find a place in the part of the Property that was not leased to Karellas to reposition the lobby, the stairway and the lift. That claim may have a superficial plausibility, but it is difficult to accept positively in the absence of evidence. It may not be necessary to resolve the issue, given the effect of other terms contained in the draft lease.

Clause 7.4 would have entitled Karellas to access and use the Premises 24 hours a day, 7 days a week. Item 9 of the Commercial Terms Schedule provided that the operating hours of the business would be 7 AM to 10 PM Mondays to Saturday, and 8 AM to 10 PM Sundays. Clause 13.13 contained a term that had the effect that Finger could enter the Premises upon reasonable notice for the purpose of carrying out any of the works contemplated by clauses 13.11 and 13.12, but this could only be done outside the trading hours of Karellas, unless agreed otherwise by Karellas acting reasonably. (This last restriction only applied to entry to the Premises, and not to the doing of work on other parts of the Building). However, to these considerations must be added the requirement in clause 25 that Finger would dedicate no less than 16 car spaces to be used by customers of the Premises. The combination of these terms would naturally tend to obstruct the capacity of Finger to construct the residential development around the supermarket being operated by Karellas. That would be so particularly in relation to the interference with the ability of Finger to load and unload materials in the car park, if Finger was required to provide the 16 car spaces on an uninterrupted basis during the operating hours of the supermarket.

It seems clear, on the probabilities, that it would have taken Finger much longer and cost considerably more for Finger to have constructed a residential development comparable to that which it actually constructed, if it had to do so while Karellas were operating a supermarket on the Property within the constraints imposed by the lease on Finger. Ben Finger agreed in cross-examination (T 92) saying: “I can’t quantify the dollar amount but it certainly would have had expensive costs, I’m not sure if it was massively”.

All of the considerations raised to this point provide grounds, albeit in most cases difficult to quantify arithmetically, for reducing the damages to which Finger would have been entitled, even assuming Finger’s claim, which it steadfastly maintained, that it was entitled to damages on the basis that it lost the benefit of a lease to Karellas on the terms that had been agreed by June 2010.

One reason for doubting that Finger would have been entitled to damages calculated on this basis is that it is inconsistent with the case that Finger pleaded and ran at the hearing. Finger’s case was that it was entitled to force Karellas to enter into an agreement for lease, and a lease, on the commercial terms in the heads of agreement, based upon Karellas’ standard documentation, after the parties had cooperated reasonably to settle the terms of the formal documentation. Finger disavowed an entitlement to require Karellas to enter into formal documentation in terms of the draft documents as at June 2010, in so far as those drafts included varied and additional terms, that were not required by the heads of agreement. In principle, Finger’s damages should be calculated by reference to the benefits that it would have received if Karellas had performed the contract.

Further, it was Karellas’ case that what Finger lost was not a lease on particular terms, but the opportunity, or chance, that the parties would in fact have agreed to the terms of formal documentation, and then executed the documents. Karellas submitted that, for various reasons, that chance was worthless, because the Court should find that the parties would not have settled and executed the formal documentation by 21 December 2010, and Karellas would have availed themselves of their entitlement, in clause 22 of the heads of agreement, to withdraw from the contract.

While I have not accepted the submission made by Karellas, in the width in which it was made, in that I have rejected the argument that Karellas in fact had a relatively unfettered right to renegotiate all of the terms, including those in the heads of agreement, I consider the submission that in reality Finger lost a chance or an opportunity to be correct in principle.

It is in my view necessary to construct a counterfactual, doing the best that can be done, to determine the course that would have been taken, or perhaps alternative courses, if Karellas had not repudiated the contract, and it had not been terminated. That is so because, even on Finger’s case, Karellas were not bound to proceed upon the terms in the draft documentation in June 2010. Karellas were at least entitled to reconsider their position in relation to the varied and additional terms, some steps required by clause 22 had not yet been completed, and most importantly, Finger itself had not entirely performed its side of the bargain in relation to clause 15.

I have found that the heads of agreement were final and binding, though it has been necessary to acknowledge that the settlement of formal documentation required the parties to cooperate reasonably to take further steps to agree on the covenants to be contained in the lease (clause 17), based upon Karellas’ standard documentation (clause 24), and to prepare various documents (clause 22) necessary for the proper construction of the supermarket. Finger was effectively required by clause 1 to proceed in accordance with Revision C. Furthermore, the heads of agreement was subject to what, in effect, was a condition subsequent (clause 22) if the formal documentation could not be settled to the agreement of the parties, notwithstanding their reasonable attempts to do so, before 21 December 2010.

The evidence shows that, before Karellas discovered their misapprehension about the forecast turnover, the parties had almost reached agreement as to the terms of the formal documentation, leaving only a small number of matters for completion. However, it is a fact that Karellas discovered their apparent error concerning the forecast turnover, before the terms of the formal documentation were settled, albeit at the 11th hour. At that time Karellas were bound by the commercial terms in the heads of agreement, including the provisions governing rent in clause 9. Karellas still had a right to manoeuvre in relation to the settlement of the terms of the formal documentation, but only within the limits permitted by the heads of agreement. I accept Finger’s submission that Karellas were not free to obfuscate or malinger in order to draw out the process, to enable them to exercise their right under clause 22 to withdraw. Karellas had an obligation to cooperate reasonably with Finger, but that obligation did not necessarily require Karellas to agree on any particular terms, and it remained possible, as a matter of contractual obligation, that the parties in response to a particular event or circumstance would not in fact agree on terms for inclusion in the formal documentation. The heads of agreement was defeasible in various circumstances, in the way that I have discussed above.

In Fishlock v Campaign Palace Pty Ltd at [276] Sackar J dealt with the proposition that the Court, in assessing damages, adopts the mode of performance which is most beneficial to the defendant, and noted that this approach did not stop the Court from deciding on the evidence, and the probabilities, what the defendant in fact would have done. In the present case Karellas had a right to abandon the varied and additional terms, and to revert to the commercial terms in the heads of agreement, and the additional covenants based on their standard documentation; provided they complied with their obligation to cooperate reasonably with Finger in the settlement of the formal documentation. It does not necessarily follow that Karellas would have taken that course, acting in their own interests. The present situation does not involve Karellas having a choice between two courses, one of which is obviously more beneficial to them than the other. This is a point at which the absence of evidence from Karellas, as to what they would have done, and why, is of some significance. Many of the variations from, and additions to, the heads of agreement were apparently agreed to by Karellas in their own interests. See for example: the agreement to a scope of works that involved work by both parties, and each contributing to the cost of the work done by the other; the inclusion of the 22 m² in the premises and the corresponding inclusion of clause 2.2 concerning the excision of the 22 m² after three years; and the agreement concerning the mezzanine floor over the back office As there is no evidence that would justify a conclusion that Karellas would have abandoned these terms as part of the bargaining process, the proper course is to assume that Karellas would not have sought to disturb them. The proper course is to consider whether there were issues that, by reason of their nature and consequences, would more probably than not have caused Karellas to attempt to renegotiate the terms of the formal documentation, within the confines of the obligations imposed upon them by the heads of agreement.

The starting point is that Karellas were bound by the commercial terms in the heads of agreement, but they did have legitimate scope to bargain, and the question is: what, on the probabilities, would have been the outcome of a legitimate bargaining process, including as to whether Karellas may have had the bargaining power to secure the agreement by Karellas to vary any of the commercial terms, even though Karellas did not have the right contractually to insist upon that outcome?

My review of all of the evidence suggests to me that there were a number of related matters, which did give rise to legitimate scope for Karellas to negotiate, in a way that gave them the possibility of moderating the effect of clause 9 of the heads of agreement. These matters included: the absence of final agreement concerning the documents required by clause 17 of the heads of agreement; the right of Karellas under clause 1 to insist that Finger adhered to Revision C or give Karellas the right to amend the terms upon which they would proceed; the fact that the drawings approved on 12 May 2010 as part of Finger’s s 96 application contained changes from Revision C; and Finger’s obligation in clause 15 to inform Karellas of the proposed development direction of the Property.

It is proper to assume that Finger would have complied with clause 15, and would also have acted reasonably in accordance with the implied term to do so, that it has pleaded in this case, as a necessary step in its argument that the heads of agreement was final and binding. In any event, by no later than the time of Mr Toole’s 9 June 2010’s letter, Karellas had made it clear to Finger that they had become concerned about the consequences of any future development of the Property. Whether that concern was genuine, or was only a point raised by Karellas as a step in an attempt to secure a renegotiation of the commercial terms in the heads of agreement, I am satisfied that Karellas would have pursued the issue vigorously in the course of the attempt to settle the formal documentation.

The 2 February 2010 concept plan (Ex A 2466) showed residential units constructed over the loading dock and car park, and not just over the supermarket. The only apparent access was at the location of the 22 m². The same was true for the 15 February 2010 concept plan (Ex A 2724 and 2725), which added a garbage room on the first floor. The 24 June 2010 plans (Ex A 3651 to 3656) show a more extensive residential development over the whole floor area of the Property on the first floor, as well as the mezzanine floor over the car park. Part of the trading area has been excised to provide for an additional stairway and a lift to the first floor. The date of these plans is between the date of Mr Toole’s 9 June 2010 letter and the letter terminating the contract on 16 August 2010. The evidence does not permit any conclusions safely to be drawn as to whether Finger’s concept of the future residential development of the Property changed materially as a result of Mr Toole’s letter.

It is therefore not precisely clear what information Finger would have provided to Karellas, if it had responded to Mr Toole’s 21 June 2010 letter, by saying that Karellas were not entitled to a master plan, but it provided in a reasonable way the information that it had concerning the future development direction of the Property. I am satisfied that the information provided would at least have informed Karellas that Finger only had a positive development plan that involved residential development, and that residential development was proposed to be constructed on a greater area of the first floor than the Bondeck slab shown in Revision C.

If it be correct to regard the first draft of the lease that Mr Toole circulated on 29 October 2009 as being a sufficient example of Karellas’ standard documentation, then there would have been significant disadvantageous consequences to Finger, if Karellas had, as Finger has accepted that it could, reverted to terms that were more consistent with those which the heads of agreement contemplated. Clause 3.22 of the October draft was a common form of covenant by the landlord for quiet enjoyment. It was expressed to be subject to the landlord’s rights reserved by the lease. Clause 3.50 reserved to the “Landlord the right from time to time to enlarge, alter or reduce the Building (other than the Premises, subject to the Landlord’s rights in relation thereto under this Lease) and to carry out construction or demolition works in any part of the Building (other than the Premises)”. This reservation was expressed to be “Subject to clause 10.1” (which was intended to mean “subject to the covenant for quiet enjoyment”). Clause 3.22 also contained a requirement that the Landlord pay reasonable compensation for any interruption to the business conducted on the Premises.

The point of all of this is that Karellas’ standard documentation gave the landlord a right to alter the Building subject to the covenant for quiet enjoyment. The Landlord had no right to alter the Premises. On the other hand, clause 13.11(a) of the June 2010 draft lease contained the Landlord’s right to alter the Building and was not expressed to be subject to the covenant for quiet enjoyment. Clause 13.11(c) provided a formula for determining in effect the compensation payable by the Landlord to the Tenant, and accordingly capped the obligation to compensate.

The June 2010 wording of the draft lease therefore would give Finger significantly more extensive redevelopment rights, and greater certainty, than it would enjoy if the relevant terms of the lease were those contained in the 29 October 2009 draft.

The probability is that, if Finger and Karellas had reverted to an attempt to settle the formal documentation contemplated by the heads of agreement, in the face of the realisation by Karellas that the forecast turnover for the supermarket was substantially less than they had expected, the parties would have retained some of the terms proposed as of June 2010, because that was in their mutual interests, but Karellas would have insisted upon the terms governing the future development of the Property that were contained in their standard documentation. That is because Karellas had become concerned about the consequences of further development, and Karellas would have wished to use their bargaining power, either to restrict the capacity of Finger to redevelop the Property, or to negotiate some advantage for themselves, most likely in relation to the amount of the rent payable under the lease.

If, in addition, in performance of its obligation under clause 15 of the heads of agreement, Finger had informed Karellas that it wished to construct a residential development on the Property that covered the whole of the site area in a way that was inconsistent with Revision C, Karellas would have had considerably more bargaining power. Karellas could have legitimately required Finger to accept a covenant that it would only develop the Property in a manner that was consistent with Revision C. That may have substantially reduced the financial viability of any future residential development.

It is then necessary to consider the effect of the changes to the Property that Finger proposed to make, as a result of the approval of its s 96 application on 12 May 2010, in so far as those changes may have involved departures from Revision C.

A significant question is whether Karellas were bound to cooperate with Finger to permit it to implement the aspects of the works approved in accordance with its s 96 application, where those works involved departures from Revision C. The answer to that question might require an investigation into whether Karellas had knowledge of the detail of the variations to Revision C, and whether they consented to the making of the s 96 application, or whether they stood by, so that they were estopped from insisting on their rights under clause 1 of the heads of agreement. As a result of the fact that Finger has not pleaded that Karellas was bound to proceed with any arrangement that had provisionally been reached by June 2010, the Court should not find that Karellas was precluded from relying upon clause 1 in relation to any change to Revision C that was made by Finger’s s 96 application.

Elements of Finger’s s 96 application, that were designed to “future proof” the Property, did involve changes to Revision C. The principal change appears to be that the first floor slab would be constructed over the full site area of the Property, and not just over the Premises.

It is probable that Karellas, after it was faced with the unexpected reduction in the forecast turnover for the supermarket, would have responded to the consequences of Finger’s s 96 application by insisting upon adherence to Revision C, because it would have been in Karellas’ interests to reduce the viability of any future redevelopment of the Property by Finger, or alternatively to reduce the impact of any future redevelopment on the operation of the supermarket.

Given the complexity of the analysis that I have been undertaking, it is appropriate that I recapitulate the position that I have reached. I began with a consideration of Finger’s damages claim on the assumption that it was correct in its claim that, if it had not terminated the heads of agreement for repudiation by Karellas, the parties would have entered into an agreement for lease containing all of the terms that had provisionally been agreed by June 2010. On that assumption I concluded that it would in principle be necessary to make a significant number of further reductions to the damages claimed by Finger, than it was prepared to concede. However, I then rejected the assumption made by Finger, because it was inconsistent in a fundamental way with the manner in which Finger has put its case. Karellas were not bound to execute an agreement for lease containing the terms provisionally agreed by June 2010, and they had in fact refused to do so. Finger’s case was explicitly that Karellas were entitled to abandon any varied or additional terms, but were obliged to revert to the negotiation of the terms for the agreement for lease that were contemplated by the heads of agreement. In considering the probable result of that process, had it been undertaken, the Court should attempt to distinguish between the terms provisionally agreed by June 2010, which appear to have been in the mutual interests of the parties, and those for which Karellas had a right, and an interest, in renegotiating. The Court should not assume that Karellas would have acted irrationally, and accordingly the probability it is that they would have proceeded with the terms provisionally agreed that were in their interest. That, however, left considerable scope to Karellas to alter their position and to renegotiate in relation to a number of significant aspects of the proposed agreement for lease.

For the reasons that I have set out above, I find that it is probable that Karellas would have insisted upon being informed of the proposed development direction of the Property; they would have required that Finger covenant that any future residential development would conform to Revision C; they would have rejected the actual proposal to construct residential units on the entire site area of the Property on the first floor; and they would have insisted that Finger ensure that all structural columns necessarily to support the concrete slab over the trading area be situated within the proposed gondolas.

It is safe to conclude that the commercial effect of Karellas adopting this position would have been to cause Finger to decide whether it should insist that Karellas proceed to enter into an agreement for lease that contained the commercial terms in the heads of agreement (including as to the rent), and also itself accept the limitations on the future development of the Property that Karellas could legitimately impose; or whether it should bargain away some of the commercial terms in the heads of agreement in order to secure Karellas’ agreement to a more liberal regime for the future redevelopment of the Property, which would maximise the prospects of Finger earning a profit from the redevelopment.

As the parties did not in any significant way enter upon this forensic battleground, it is a matter for speculation as to which of these courses the parties would have undertaken, and what the result would have been. The primary driver of the outcome would probably have been Finger’s own commercial appreciation of the differential feasibility and prospects of the more restricted development that Finger could have insisted upon consistently with the terms of the heads of agreement, and the more expansive development that it at that time aspired to undertake.

It can be said that, even if Finger bargained with Karellas to secure their agreement to the agreement for lease containing terms that permitted Finger to undertake the more expansive residential development, the agreement for lease, and then the lease, would still have contained relatively onerous covenants, that would have imposed significant costs and inhibitions on Finger when it proceeded with the redevelopment, than was the case with the actual redevelopment, which was undertaken in the absence of any supermarket being operated on the Property.

Had I been required to make a positive assessment of Finger’s damages, it would have been necessary for me to rule on Karellas’ primary submission that Finger only lost the value of a chance that the parties would have in fact executed an agreement for lease by 21 December 2010; and that the value of that chance was nil. I accept that Finger lost the value of the chance, but I would not accept that the value of that chance was nil. The evidence before the Court showed that the parties were in fact capable of negotiating satisfactory terms in a relatively expedited way when they were acting cooperatively. Their consultants were also able to reach the necessary technical agreement on the various documents required by the heads of agreement in a relatively short time. Even though it must be accepted that the advent of Karellas’ realisation that the turnover was likely to be substantially less than was originally expected would probably have significantly changed the atmosphere in which further negotiations were conducted, there is no basis for me to conclude that more probably do not the parties would have been unable to reach an agreement before 21 December 2010. The failure of Karellas to call any persuasive evidence on this issue reinforces me in my conclusion that I should not find that the parties would have failed to reach any agreement. The probabilities are that they would have reached an agreement, but for the reasons that I have set out above, the terms of that agreement are a matter of speculation. The need for speculation arises partly out of the dearth of evidence, and partly out of the relatively unusual circumstance that the contract was not a lease, or even an agreement for lease, but it was an executory heads of agreement that required a significant number of steps to be taken by the parties acting reasonably and cooperatively before the terms of the agreement for lease could be known.

It remains necessary for me to deal with the question whether in principle Finger is required to bring to account the profit that it made from the actual residential development that it implemented in the calculation of the damages to which it would have been entitled if it had succeeded on the issue of liability.

I have concluded that the assessment of Finger’s damages should be undertaken on the basis that the damages should be reduced by the amount of the profit earned by Finger from the residential development. That conclusion is subject to an important qualification that I will consider below.

There was a causative link between the termination of the heads of agreement and the opportunity that Finger seized to construct the residential development on the Property that it actually constructed; and the profit that it thereby earned was sufficiently connected to the circumstances in which the heads of agreement was terminated, that it is proper and just to take the profit into account.

First, I find that as a matter of fact Finger seized the opportunity following the termination of the heads of agreement to adjust the nature and timing of its redevelopment project for the Property to optimise its ability to achieve both the supermarket and the residential development in the most cost-effective way.

Secondly, I find that Finger could not have constructed the 22 unit residential development that it in fact undertook, had the heads of agreement been performed, without the consent of Karellas, and it is probable that Karellas’ consent would not have been given.

Thirdly, Finger was able to make significant adjustments to the layout of the supermarket that it constructed for the purpose of leasing the premises to Woolworths, as compared to the layout of the Premises, which it would not have been able to make, if the heads of agreement had been performed.

Fourthly, Finger was able to avoid any planning restrictions that may have been an impediment to the implementation of any residential development on the Property, with which it would have had to deal, if the heads of agreement had been performed. I refer particularly to the fact that Revision C only provided for one means of access to the first floor from within the Premises, and there probably would have been some restrictions upon Finger providing all other required means of access from other parts of the Property in a manner that did not infringe Karellas’ rights under the lease.

Fifthly, I find that Finger was able to avoid all of the very serious impediments to the efficient construction of the residential development that it would have faced, if it had attempted to construct the residential units around a working supermarket being operated by Karellas.

Sixthly, Finger also avoided the liability that it probably would have incurred to Karellas, for breach of covenants in the lease, if it had attempted to construct a residential development around a supermarket being operated by Karellas.

The third to sixth reasons that I have outlined are of additional significance, because, viewed at the point of time when Finger had to make a decision as to whether or not the proposed residential development was feasible as a commercial and planning matter, had these restrictions continued to exist, they would have substantially increased the doubts experienced by Finger concerning the commercial viability of proceeding with a residential development at all.

Seventhly, Finger was able substantially to accelerate the completion of the residential development compared to the timing of the residential development that would have operated had Finger been confined by the terms of the proposed lease.

The qualification to which I have alluded above is that the circumstances of this case do not justify a conclusion that necessarily the whole of the profit earned by Finger should be brought to account in reduction of the amount of the damage that it suffered. The reason is that this is not a case where Finger has been able to construct a residential development in circumstances where, absent the breach, it could not have constructed any residential development. In principle the heads of agreement permitted Finger to proceed with a further residential development, albeit one that was confined by various terms in the heads of agreement, in particular the restrictions implicit in Revision C. The allowance that must be made is therefore not the whole of the profit, but the difference between that profit and the profit that may notionally have been made by Finger if the heads of agreement had been performed, and Finger had implemented a residential development within the confines of what was permitted by the heads of agreement.

That, logically, introduces the need to assess the probability that Finger could viably have proceeded with the more restricted development, and that it would have made a profit. That is another issue that is entirely a matter for speculation. Notwithstanding that the issue of whether Finger’s damages should be reduced by the amount of the profit that it made on the residential development was squarely raised by Karellas’ defence, the only evidence on the subject of whether Finger could successfully have constructed a residential development within the confines of the heads of agreement consisted of nothing more than an assertion to that effect by Ben Finger in cross-examination.

I bear in mind that Giles JA in Ruthol at [44] restated the principle that the guilty party bears the burden of proving that loss has been avoided, and the extent to which it has been avoided. However, there is a real question in this case as to the extent to which the burden of adducing evidence shifted to Finger, as the only party whose knowledge and intention, and experience, was relevant to the issues that would arise in the assessment of its damages out of the further redevelopment of the Property. Finger has sought to deal with all of the difficulties and complexities that naturally arise out of the task of attempting to assess the damages to which it would have been entitled by denying that they exist. The result has been that Finger’s damages claim is, with respect, in the nature of an ambit claim. That has seriously exacerbated the difficulty involved in making an objective assessment of the quantum of loss.

If it becomes necessary to determine the amount of the damages to which Finger is entitled, and if that task must be undertaken on the present evidence, and without the advantage of further submissions, the Court would be driven to making a global assessment of general damages, doing the best it could, allowing for all perceived doubts and contingencies.

I should record that there were a number of additional issues raised by Karellas in their final written submissions concerning the assessment of damages. It will be appropriate to leave those issues for further consideration, if that becomes necessary.

I make the following orders:

In par 508 above I have stated that Finger had not provided a calculation of the reduction in rent referred to in that paragraph. That was an error. Finger’s solicitor provided the calculation as an attachment to an email sent to my chambers on 22 August 2014, after judgment was reserved. Karellas have not delivered any response to that email. It has been placed on the file.