DHBC Pty Ltd v Fitzroy Island Pty Ltd [2006] QSC 98

SUPREME COURT OF QUEENSLAND CITATION: DHBC Pty Ltd & Fitzroy Island [2006] QSC 098 PARTIES: DHBC PTY LTD ACN 102 662 279 (Plaintiff) v FITZROY ISLAND PTY LTD ACN 089 188 901 (Defendant) FILE NO/S: 389 of 2005 DIVISION: Trial PROCEEDING: Application ORIGINATING COURT: Supreme Court, Cairns DELIVERED ON: 3 April 2006 DELIVERED AT: Cairns HEARING DATE: 1 February 2006 JUDGE: Jones J ORDER: 1. On its true construction, clause 5 of the Licence Agreement dated 17 February 2000, does not entitle the plaintiff to an extension of the term of the Licence Agreement for a further period of five years but in accordance with its admission, the defendant is obliged to negotiate in good faith with the plaintiff to extend the licence granted in the Licence Agreement: (a) after expiration of the term (being a five year term commencing on 17 February 2000 and ending on 17 February 2005); (b) for an additional term (defined in clause 1 of the Licence Agreement as five years); and (c) provided the plaintiff had, during the term, fully performed its obligations under the Licence Agreement and had given the defendant six months’ written notice of the plaintiff’s desire to renew the Licence Agreement prior to expiration of the term (on 17 February 2005). 2. The plaintiff’s claim is dismissed. 3. The plaintiff pay the defendant’s costs of and incidental to the applications filed 29 November 2005 and 23 January 2006 and the proceeding on the standard basis. CATCHWORDS: CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – OFFER AND ACCEPTANCE – MATTERS -- 1 of 8 -- 2 NOT GIVING RISE TO BINDING CONTRACT – VAGUENESS AND UNCERTAINTY – AGREEMENT SUBJECT TO FURTHER AGREEMENT OR ARRANGEMENT – where Licence Agreement contemplated an additional term of a lease – where Licence Agreement directed that parties negotiate in good faith to extend the licence – whether Licence Agreement entitled plaintiff to an extension of the terms of the licence agreement as of right – whether undertaking to negotiate in good faith enforceable Rule 483(1) Uniform Civil Procedure Rules Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Demtear Pty Ltd v Abelian Pty Ltd (2004) QSC 103 Godecke v Kirwan (1973) 129 CLR 629 Hillas v Co Ltd v Arcos Ltd (1932) All ER 494 Placer Development v The Commonwealth (1969) 121 CLR 353 Thorley v Goldberg (1964) 112 CLR 597 Walford v Miles (1992) 2 AC 128 COUNSEL: Mr A Philp SC, with him Mr Jonsson for the applicant/plaintiff Mr D Morzone for the respondent/defendant SOLICITORS: Gadens Lawyers for the applicant/plaintiff Miller Harris Lawyers for the respondent/defendant [1] The plaintiff company carries on a business which conducts diving, snorkelling and related activities at the tourist resort on Fitzroy Island, located off the coast of Cairns in the State of Queensland. The business is conducted pursuant to a Licence Agreement with the defendant company Fitzroy Island Pty Ltd (hereinafter “Fitzroy”) which operates the resort. [2] The Licence Agreement (“the agreement”) was entered into between Fitzroy and another corporate entity on 17 February 2000. That entity, on 16 November 2002, assigned its rights and obligations to the plaintiff, DHBC Pty Ltd, (hereinafter “the licensee”). [3] By the agreement the licensee, in consideration for its payment of royalties and rents to Fitzroy, was entitled to use a business name and certain defined premises owned by Fitzroy as well as having access to the resort’s swimming pool and other equipment and facilities.1 1 See para 3.1 of Licence Agreement ex BCO1 Affidavit Brendan Caulfield sworn 24 January 2006 -- 2 of 8 -- 3 [4] The term of the agreement as defined in clause 1 was for a period of five years commencing on 17 February 2000. The agreement contemplates an extension of the licence for “an additional term” which is defined to mean a further term of five years commencing upon the expiration of the original term. [5] The licensee claims to have a right to extend the licence and to have exercised that right in accordance with the agreement. Fitzroy contends that the agreement gave to the licensee no such right and refuses to grant the extension. The licensee has instituted these proceedings to claim damages for that alleged breach of agreement. [6] By orders dated 2 December 2005 and 23 January 2006, the proper construction of the relevant terms of the agreement – clause 5 – is to be determined as a preliminary issue pursuant to Rule 483(1) of Uniform Civil Procedure Rules. Construction of Clause 5 [7] Clause 5 provides:- “RIGHT OF RENEWAL Fitzroy agrees to negotiate in good faith with the Licensee to extend the licence granted in this Agreement after the expiration of the Term for an additional term, provided the Licensee has fully performed its obligations under this Agreement and has given Fitzroy six (6) months written notice of the Licensee’s desire to renew this Agreement prior to the expiration of the Term.” By virtue of clause 2 of the agreement, the words of the heading do not affect the construction of the clause. Also, for the purpose of this preliminary hearing only, no question arises as to compliance with the proviso. [8] The agreement was prepared by lawyers and in its 22 pages, it details with some precision the basis of the relationship between the parties. [9] The licensee’s claim to have a right to an extension of the term proceeds on two bases. Firstly, that the agreement, as a commercial contract should be construed in a sensible commercial way – the construction must yield to business common sense. Secondly, the court will strive to uphold a commercial contractual bargain so long as in doing so it is not creating a new bargain. The result is that the court would be loath to find uncertainty where there is a construction with a practical business outcome. [10] Fitzroy submits that the terms of clause 5 are unambiguously clear and all that was promised and accepted was an agreement “to negotiate in good faith to extend the licence”. Whilst on one view these words might seem no more than an agreement to agree making any suggested right illusory and unenforceable, the licensee contends that the clause offers more and would in these circumstances be enforceable and that its breach may result in an award of damages for the loss of a chance to extend the term. -- 3 of 8 -- 4 [11] The concept of a duty “to negotiate in good faith” has been the subject of judicial determinations in England and Australia.2 In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd3 Kirby P (Waddell AJA agreeing) undertook an extensive examination of English and Australian authorities and came to the view that in some circumstances a promise “to negotiate in good faith” will be enforceable depending upon its precise terms. He said (at p 26):- “Nevertheless, alike with Goff LJ in Malozzi and the substantial body of United States authority which has been cited in this case, I believe that the proper approach to be taken in each case depends upon the construction of the particular contract: see Australia & New Zealand Banking Group Ltd v Frost Holdings Pty Ltd. In many contracts it will be plain that the promise to negotiate is intended to be a binding legal obligation to which the parties should then be held. The clearest illustration of this class will be cases where an identified third party has been given the power to settle ambiguities and uncertainties: see Foster v Wheeler; Axelsen v O’Brien and Biotechnology. But even in such cases, the court may regard the failure to reach agreement on a particular term as such that the agreement should be classed as illusory or unacceptably uncertain: Godeck v Kirwan and Whitlock v Brew. In that event, the court will not enforce the arrangement.” (Citations omitted) The other member of the Court, Handley JA, took the view that clauses of this kind were simply unenforceable. This decision was referred to in Australis Media Holdings Pty Ltd v Telstra Corporation Ltd4 but was not reconsidered by the Court of Appeal. However reference was made to the decision of Walford v Miles5 where the House of Lords confirmed the generally held view that such terms are enforceable. [12] Whether or not the terms of clause 5 give rise to an enforceable obligation to negotiate or to a bargain that is merely illusory, Fitzroy contends that the words cannot be construed so as to give to the licensee a right to renew. [13] It is clear that the agreement was entered into for a commercial purpose. It is reasonable to assume that the parties were dealing with each other at arms length. The agreement contemplates the prospect of an additional term but the question is whether the language manifests an intention to grant it at the election of the licensee. [14] The licensee points to a number of textural clues which it argues indicates the parties’ intention to create a “right” to extend the term of the licence. These include the requirements of six months notice and the compliance with performance obligations; the use of the word “extend” suggesting continuity; the contemplation of continuity in the words of certain clauses namely – Clause 12.1 – continues to occupy after [the term] has expired. Clause 13.1 – during term or any extension of it. Clause 13.2 – after expiry of agreement or any extension of it. 2 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600/604; Hillas & Co Ltd v Arcos Ltd (1932) All ER 494 3 (1991) 24 NSWLR 1 4 (1998) 43 NSWLR 104/128 5 (1992) 2 AC 128, particularly at p 138 -- 4 of 8 -- 5 [15] As to any suggestion that the clause is void for uncertainty, the licensee argues that the essential elements of any additional term are agreed. The duration of five years is fixed. The assessment or royalty or rent is a detail of the agreement as, indeed, is the scope of the business. Once the commercial nature of the agreement is accepted then the clear choice is between giving business efficacy to the agreement or having it lapse because it is either illusory or uncertain. In this regard the licensee refers to remarks of Muir J in Demtear Pty Ltd v Abelian Pty Ltd6 [in para 26] as follows:- “…the authorities referred to earlier show that, as a general proposition, consideration will not be regarded as illusory if a promisor having a discretion as to performance must exercise it within specified parameters. Apart from these considerations, the plaintiff’s illusory contract argument is incompatible with the approach discussed earlier, that courts will, wherever possible, strive to uphold contractual bargains provided that to do so does not require the court itself to make the parties’ bargain for them.” On the issue of uncertainty, his Honour said (at [32]):- “As the clause does not mention the commencement and duration of the new lease, it is implicit that it commences at the expiration of the existing lease and is for the balance of its term. That construction in my view best gives effect to the intention of the parties insofar as it can be ascertained from the terms of the sub-lease. It also achieves the requirement of construing a commercial document so as to make commercial sense of it and, observes the dictate that ‘courts should be astute to adopt a construction which will preserve the validity of the contract’. Consistently with principle, it upholds the parties’ commercial bargain.” (Citations omitted) [16] Mr Philp of Senior Counsel for the licensee argued that there is an inherent ambiguity in clause 5. It arises because the envisaged negotiation in good faith could relate to the terms of the extended agreement as opposed to whether there was to be an extension at all. He submitted the word “extend” in clause 5 suggests that the terms which bound the parties during the original licensing agreement would remain operative save to the extent as might otherwise be negotiated between the parties in good faith.7 Any extension of the agreement had the certainty as to the term. The requirement to negotiate in good faith might relate to remuneration or simply to peripheral issues of circumstances of the use of the name, terms of access to the swimming pool and any relocation of premises. [17] Such an approach would require the clause to be construed as though the words “to extend on terms to be negotiated in good faith” were inserted after the opening words “Fitzroy agrees”. Quite apart from doing violence to the text it would not provide to the licensee any greater certainty. Presumably failure to agree on matters other than the term would mean the agreement would come to an end at the election of either party. If, for example, the remuneration was to change or the scope of the business or the availability of premises were to change, then there is no mechanism provided by the agreement for settling the terms in the event of the parties not being 6 (2004) QSC 103 7 Transcript at p 10 -- 5 of 8 -- 6 in agreement. Thus, it seems to me, the licensee would have to confront the principles referred to by Gibbs J in Godecke v Kirwan8 , where he said:- “I should perhaps make it clear that it does not necessarily follow from what I have said that an agreement which left further terms to be settled by one of the parties, rather than by his solicitors, would be treated as a concluded contract. In May & Butcher Ltd v The King, Viscount Dunedin suggested that a sale of land which left the price to be settled by the buyer himself would be good. With great respect, it seems to me that there would be no binding contract in such a case, which would fall within the principle that ‘where words which by themselves constitute a promise are accompanied by words which show that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought’. It might be suggested that the same principle would not apply if the determination of the price were left to the seller for then it would be the promisee, not the promisor, who was left with the discretion as to performance. However, in Beattie v Fine Cusson J drew no such distinction and held that an option for renewal ‘at a rental to be agreed upon by the lessor’ did not give rise to any contractual obligation.” [18] Similarly in Placer Development v The Commonwealth9 Kitto J identified the principle. It is that whenever words which by themselves constitute a promise are accompanied by words showing that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise the result is that there is no contract on which an action can be brought at all. Mr Morzone of counsel for the respondent referred to the remarks of Menzies J in Thorley v Goldberg10 citing Sugerman J that “there can be no binding and enforceable obligation unless the terms of the bargain, or at least its essential or critical terms, have been agreed upon”.11 [19] It follows that a construction which leads to the granting of an extension of the term of a licence where there is no mechanism by which such matters as remuneration, rental and scope of business are to be determined, would not result in an enforceable agreement. The suggestion that the words in Clauses 12.1, 13.1 and 13.2 provided textural clues for an extension of the term as of right does not, in my view, add weight to the licensee’s argument. As the document itself contemplated an extension by further agreement between the parties these other provisions did no more than reflect that fact. They do not assist in the determination of whether the proper construction of clause 5 results in an extension by further agreement or an extension as a matter of right. [20] The nature of the business was one of a service to tourists and others using the island resort. The terms of the agreement did not indicate any requirement of significant capital investment by the licensee that needed to be protected by an extended duration of the licence. The suggestion that any extension would be 8 (1973) 129 CLR 629 9 (1969) 121 CLR 353 10 (1964) 112 CLR 597/607 11 See also Coal Cliff (supra) at p 20 -- 6 of 8 -- 7 granted on the same terms as the initial agreement could hardly have been the intention of the parties who envisaged some negotiation to proceed the grant of any extension. It is in this respect that the circumstances here are distinguishable from the facts in Demtear. There Muir J was concerned with a planned relocation of premises during the currency of the term of the lease. The lease agreement specified clear parameters for the new premises and his Honour found there was a mechanism for the determination of any uncertainty. Also the lessor was bound to perform the terms of the lease within those agreed parameters allowing his Honour to find that the contract was not illusory. 12 [21] Moreover, I take the view that had the parties before me intended that there would be an option to extend (at the election of the licensee) then it would have been a simple matter for a lawyer to incorporate the usual terms for such an option and to provide the mechanism for fixing the terms of the bargain. This is not an instance of some informal commercial document being relied upon by non-lawyers to determine business relationships. It is a formal document in which one would expect that had the parties intended to create an option to extend the term, that intention would have been expressed in clear words. The fact that a contract may be classified as being commercial does not permit the disregard of the plain meaning of the words used, nor, in accordance with principles referred to, can the Court make a new bargain. The language of clause 5 is open to the interpretation that the parties intended them as an invitation to treat in good faith or as an expression that as a matter of honour they would do so. In accordance with principle, terms so construed do not give rise to an enforceable bargain. [22] Fitzroy in its Amended Defence conceded that the relevant terms imposed on it an obligation “to negotiate in good faith”. In further argument before me, Fitzroy sought a declaration in terms that the clause provided for an invitation to treat but coupled with the obligation to negotiate. It is sufficient, I believe, for the purpose of this application to note Fitzroy’s acceptance of this obligation. [23] The parties have chosen not to use the familiar terms for the giving of an option to extend the licence agreement. I cannot find in the words, in the context of the document as a whole, an intention on the part of Fitzroy to be bound to extend the agreement in the manner suggested by the licensee. Though this construction would result in this commercial agreement having no effect, or at best the limited effect accepted by Fitzroy, there is no basis for concluding that Fitzroy intended to grant the licence on terms which effectively would allow the licensee to maintain the licence for a period of ten years. [24] Having determined upon this construction, there is no requirement to consider the question of severance from clause 5 of the words “to negotiate in good faith”. [25] Having determined the preliminary point against the licensee, the only basis for its claim against Fitzroy is removed. As a consequence I should allow Fitzroy’s application made pursuant to r 293 UCPR. In accordance with the terms of that rule I am satisfied that the plaintiff has no real prospect of succeeding in its claim and that consequently there is no need for a trial of the claim. Orders 12 Demtear (supra) at [26] -- 7 of 8 -- 8 [26] 1. On its true construction, clause 5 of the Licence Agreement dated 17 February 2000 does not entitle the plaintiff to an extension of the term of the Licence Agreement for a further period of five years but in accordance with its admission, the defendant is obliged to negotiate in good faith with the plaintiff to extend the licence granted in the Licence Agreement: (a) after expiration of the term (being a five year term commencing on 17 February 2000 and ending on 17 February 2005); (b) for an additional term (defined in clause 1 of the Licence Agreement as five years); and (c) provided the plaintiff had, during the term, fully performed its obligations under the Licence Agreement and had given the defendant six months’ written notice of the plaintiff’s desire to renew the Licence Agreement prior to expiration of the term (on 17 February 2005). 2. The plaintiff’s claim is dismissed. 3. The plaintiff pay the defendant’s costs of and incidental to the applications filed 29 November 2005 and 23 January 2006 and the proceeding on the standard basis. -- 8 of 8 --