Fernkiln Pty Ltd v Australian Building Industries Pty Ltd [1998] QSC 23

'", .,. ! { l. ( ( : I IN THE SUPREME COURT OF QUEENSLAND TOWNSVILLE BETWEEN: FERN KILN PTY LTD Plaintiff AND: AUSTRALIAN BUILDING INDUSTRIES PTY LTD No 119 of 1997 Defendant REASONS FOR JUDGMENT - CULLINANE J. DATED THE FOURTH DAY OF MARCH 1998. This action rises out of dealings between the plaintiff and the defendant and the construction by the plaintiff of a substantial building which it had been contemplated would be occupied by the defendant pursuant to a lease. The issue which arises is whether there was any concluded agreement for a lease and secondly, whether, if there was not, an estoppel arises which precludes the defendant from denying either that there was such a lease or alternatively denying that it was bound to conclude such a lease. The land upon which the building was constructed is owned by the plaintiff and it is the plaintiff's case that the lease relates to a part of that land. -- 1 of 15 -- ( ( i ( ) , "\. 2 The plaintiff argues that an agreement was reached between the parties in mid July 1996. It is contended that a proposal submitted by the plaintiff to the defendant dated 17 July 1996 constituted an offer which was accepted by the forwarding of a letter of intent on 19 July by the defendant to the plaintiff. In addition the pleading alleges a conversation between a Mr Hastie on behalf of the plaintiff and a Mr Irwin on behalf of the defendant on or about 19 July 1996 although I think it is fair to say that the plaintiff primarily relied upon the two documents I have referred to. The first document is headed "Design and Construct" and was prepared by Ferry Real Estate for the plaintiff or an associated company which carried out the building work. It is exhibited to the first affidavit of Mr Aylward. The real property description contained in the proposal and the area described referred to the whole parcel rather than the part ont upon which the building was to be constructed. Under the heading, "Lease" the following appears: "Seven year term certain plus similar option of five years. The terms and conditions of the lease shall be normally acceptable terms and conditions as prevail in the North Queensland region. The Lease is obviously varied to suit the circumstances of the particular development." The document referred to gross rental of $82,200 per annum and under the reference to rental appears: "Note; gross rental includes all outgoings." However, it went on to provide that the Lessee was to pay increases in rates, fire -- 2 of 15 -- ( ( ( 3 levy, air conditioning, maintenance, and building insurance over the lease year. It concludes with the following: "Provided that the proposal is accepted by 25 July, it is envisaged that handover would be approx 18 December 1996. The move in could then be instigated over the Xmas break for set up by 2 January 1997. Lease payments would then commence 1 February 1997." There was a detailed description of the building to be constructed, which was to be custom built for the defendant's business. Mr Hastie, an employee of the plaintiff or an associated company, and who had previously been an employee of the defendant was aware of the fact that the defendant was seeking to have premises constructed at which it could conduct its business, a~d knew that the plaintiff owned suitable land. He held a meeting with Mr Irwin, an employee of the defendant who was at the time described as "general manager-branches." This led to the preparation of the document that I have referred to. Mr Hastie says that he indicated to Mr Irwin the area of land which would be subdivided off, something which Mr Irwin says he does not recall although he says that he did go to the site with Mr Hastie. Mr Hastie says that Mr Irwin asked that he (Mr Hastie) arrange for a proposal to be prepared and forwarded to him and said that it would be considered by a board meeting on 19 July if it was to hand by that date, and a letter of intent would be sent -- 3 of 15 -- ,--- ( 4 on that day if the proposal was approved. According to Mr Hastie, Mr Irwin said that once the letter of intent had arrived the building work could start immediately and occupation was required by 2 January 1997. Mr Irwin denies making any statement about the commencement of the building work. The defendant, under cover of a letter dated 19 July 1996, forwarded a document headed "Letter of Intent." The covering letter stated that there were some changes to the proposal, the major one being the desire to have a separate lease agreement for overhead cranes which were to be included in the construction. The initial rental was shown at $76,000 per annum gross and the document went on later to relate that there would be included two six tonne full travel cranes at an approximate lease cost of $6,200 per annum. Under the heading "Outgoings" the word, "Nil" appeared. Under "Reviews" the words, "Annual increases at Brisbane CPI rate to a maximum of 6%" appeared. The Letter of Intent contained the following paragraph: "Legal costs - the roofing centre would prefer that each party pay their own legal costs and outlays in relation to preparation of lease documents (with the exception of stamp duty and registration fees.)" It also provided: "The lessor should complete the construction of the building no later than 18 December 1996, failing which The Roofing Centre Pty Ltd will be entitled to -- 4 of 15 -- ( ( 5 terminate or renegotiate the agreement of the lease." At the back of the document was a sheet which was headed "This agreement dated- ------" and which made provision for signature by the lessee and the lessor and witnesses. The defendant signed by a Mr Webb but the exhibit does not have any signature on behalf of the plaintiff although Mr Aylward says that he in fact signed the document at some time. All of the dealings up to this time had been between Mr Hastie and Mr Irwin. Mr Hastie says that Mr Irwin contacted him on 19 July and told him that the project had been approved. He says that he told Mr Irwin that he would commence work straight away. ( ) According to Mr Irwin, whilst he told Mr Hastie that the board had approved the project, he did not regard that as being a final agreement but thought that a lease ( would have to be prepared and executed by the parties. He cannot recall if Mr Hastie said that they would commence work straight away but acknowledged in evidence that some steps would have had to have been taken fairly quickly to meet the timetable. He suggested that since no approval had been obtained from the local authority it would be necessary for steps to be taken quickly because of the time that these usually take to be granted although he suggested that there was ample time for the actual construction. -- 5 of 15 -- 6 The steps which were taken upon the receipt of the letter of intent are set out in the affidavit of Mr Aylward. These included, apart from the preparation of plans and the lodging of application for approval, the ordering of two internal cranes costing approximately $63,000. On about 7 October 1996 Mr Hastie requested advice from the Townsville manager of the defendant on machine layout and layout of the three phase power in the slab. Earthworks commenced on 8 October 1996. (' Mr Aylward, a director of the plaintiff, consulted solicitors in August 1996 and as a result a letter dated 15 August was written to the defendant in the following terms: "We advise we act for the Directors of Fernkiln Pty Ltd who have instructed us to act in relation to the proposed Lease of the above property. We have been handed a copy of your letter of the 19th July and in respect of the Letter of Intent enclosed therewith we are instructed to comment as follows:- (a) The rental of $76,000.00 per annum gross is agreed. However, your company will be responsible for all outgoings in respect of the demised • \_ premises; (b) The annual increases in line with the CPI with a maximum of 6% is agreed. However, the increase is to apply to the whole rental with no concession for the value of the cranes; (c) OUfclients are prepared to waive the usual requirement for Directors Guarantees if we can be provided with a reference from the Company's Bank; (d) In relation to the payment of costs and outlays we advise our clients are prepared to meet their own costs in all matters leading up to the preparation and registration of the final Lease. In other words each party will meet their own costs in respect of the negotiation preparation and execution of the initial agreement to Lease, but -- 6 of 15 -- i ( 7 you will be responsible for our clients costs and all outlays in respect of the Final Lease. We advise that all other matters referred to in your letter of Intent are agreed. We look forward to receiving your acceptance of the matters referred to above at your earliest convenience so that we can proceed with the preparation of the necessary documents." By a letter of 5 September 1996, solicitors engaged for the defendant responded and as can be seen, agreement was reached about the matters raised by the plaintiff's solicitor. This letter concluded: "Would you please proceed with the preparation of lease documentation and submit a draft of the agreement for lease and lease to this office for perusal on our client's behalf." On 9 September 1996 the plaintiff's solicitors replied that they would now proceed with the preparation of the agreement to lease once the plan had been finalised. A lease and agreement for lease were forwarded by the plaintiff's solicitors to the solicitors for the defendant by letter of 11 November 1996. Reasons for the delay (, were not fully explained in evidence although Mr Aylward suggested that one difficulty which arose was that the defendant's solicitors wanted separate leases for the cranes and the building and this led to some delay before matters were resolved. There is no correspondence before the Court on this subject. The matter had been raised in the letter of 19th July. It would seem that the defendant at some time determined to change the nature of its operations in Townsville which would have made the use of the premises to be -- 7 of 15 -- ( ( 8 constructed unnecessary although there would still have been a need for some smaller building. Mr Irwin arranged to meet Mr Hastie and Mr Aylward some days prior to 11 October. Mr Hastie suggested it was on 9 October. At this meeting, Mr Irwin raised the question whether the building could be made smaller and Mr Aylward said that in view of the monies that had been spent it would not be possible to do so. It was left on the basis that Mr Irwin would contact his superiors in Brisbane and that a letter would be written. It would also seem that somewhat earlier than this Mr Irwin had contacted Mr Hastie raising the possibility that one of the cranes could be deleted. Mr Hastie says that he told Mr Irwin this was not possible and Mr Irwin said "All right. Just let it go." Mr Irwin generally agrees with what is said about this conversation although he says that he cannot recall being told that the cranes had been ordered. By a letter of 11 October 1996, the defendant wrote to the plaintiff in the following terms: "I regret to inform you that due to a major policy change in our company's manufacturing division, we no longer require the building you have proposed to us at 608 Ingham Road Townsville. Please instruct your Solicitors not to go ahead with lease documents to avoid unnecessary costs. We do however still require new premises and would be happy to occupy the office area and shed of 20 x 15 with front access only. We do not require a crane but under the circumstance we could accept one only. We would be prepared to pay $2,800-00 per calendar month for the above with the crane or $2,300-00 without. Please accept my apologies for this change and notify me as soon as possible if this is acceptable." -- 8 of 15 -- ( '. ( 9 At this time excavation works had been under way for only a few days. The plaintiff replied to the letter by a letter of 16 October 1996; "We refer to your letter of the 11 th October advising that you no longer require the building we have commenced constructing on your behalf. Unfortunately, we advise that it is too late for you to change your requirements at this stage. Our respective Solicitors have concluded the terms of the Agreement for Lease and the Lease, and our Solicitors have prepared a" documents ready for signature. There is, accordingly, a binding Agreement already in existence. On the basis of that Agreement our Company has entered into a Contract for the sale of the property, and that Contract is, of course, subject to the Lease we have agreed to. If the Lease does not proceed that Contract will fail, and our Company wi" be faced with the prospect of legal proceedings and/or substantial financial losses. In addition to these matters we have ordered a" building materials; ordered both cranes; prepared and had passed a" plans; prepared and lodged a" necessary sewerage, survey, power, workplace and safety and building applications. The cranes are in transit, the pre-fabrication works underway and the earthworks commenced. Accordingly, we advise it is not possible to change the construction in the manner referred to in your letter, and the project must proceed in the manner agreed. Kindly confirm that the agreement wi" be complied with as a matter or urgency." A further meeting was arranged between Mr Aylward and Mr Hastie on one side and on the other side, Mr Irwin and this took place on 23 October 1996. Also present was the Townsvi"e manager of the defendant. According to Mr Hastie Mr Irwin apologised for the way matters were proceeding but said that a business decision had been made to cease production of roofing and -- 9 of 15 -- 10 tiling. Mr Hastie says that Mr Irwin stated that until a final decision had been made by the defendant the plaintiff would have to continue building the complex. Mr Irwin denies saying this although he suggested in cross-examination that what may have .happened was that Mr Hastie and/or Mr Aylward had pointed out the position the plaintiff was in and the fact that considerable monies had been expended and works carried out, and that in its position, the plaintiff had no option but to proceed and that Mr Irwin may have acknowledged the difficulty of the plaintiff's position and said that he understood why the plaintiff considered it had no option but to proceed. find it difficult to accept that Mr Irwin would have used language of the kind. Mr Hastie says he did in view of the letter of 11 October and his own statement, th~t the defendant had changed its operations and would no longer be carrying out the production of roofing in Townsville. After this, the plaintiff on occasions wrote to the defendant about the progress of the building. Upon the receipt by the solicitors for the defendant of the draft agreement for lease and lease (which came under cover of a letter dated 11 November 1996) those solicitors wrote to the plaintiff's solicitors denying the existence of any binding agreement stating that it was always the defendant's intention that a concluded lease would only be effected by the execution of the formal agreement. There was some contact between representatives of the plaintiff and the defendant's local manager about the nature of the floor and the location of power -- 10 of 15 -- ( 11 points after this but I do not regard these as matters of any significance on the evidence I have before me which is relatively limited. The plaintiff contends that the defendant, by the letter of intent, concluded an agreement with the plaintiff by accepting the offer contained in the design and construct document. Whilst it might readily be accepted that a substantial level of agreement was reached, it is clear from the letter to the defendant on 15 August 1996 that some matters were outstanding. These were of some significance in relation to the rent, the dispensation with directors guarantees and costs and outlays. I do not accept that an agreement had been concluded as the plaintiff contends. It is also clear that in consulting solicitors the plaintiff did so for the purposes both of negotiating the outstanding matters in relation to the lease and to prepare the formal documentation. It is clear that the solicitors could not conclude an agreement on behalf of the parties. See Pianta v. National Finance and Trustees Limited (1964) 180 CLR 146. I think that the proper conclusion to be drawn from the dealings between the parties is that it was intended that they would be bound only upon the execution of the formal agreement. -- 11 of 15 -- 12 The parties each desired to get the project underway. The defendant wished to enter into possession by the end of the year and the plaintiff it seems wished to sell the building tenanted. It is in the circumstances perhaps not surprising that the plaintiff with the defendant's knowledge commenced to get the project under way. It is clear that the defendant was aware that at least some of these steps had been taken, particularly ( .. \ so far as the obtaining of approval, permits and the like are concerned. The evidence does not satisfy me that the defendant was aware that substantial (' expenditures had been made or obligations incurred in relation to the cranes prior to the discussion to which I have referred. Nor am I satisfied that Mr Irwin told Mr Aylward that work should commence once the approval of the board of the defendant was obtained. However, I am satisfied both parties proceeded on the basis that the project would get under way after the Notice of Intent was forwarded. The defendant was at all times aware that the plaintiff was proceeding with the project. I am satisfied that the time-frame allowed was fairly tight although the evidence does not permit a conclusion as to the least time the building would have taken to complete The preparation of the formal documents took a considerable time which is not wholly explained by the evidence. As already mentioned, Mr Aylward suggested some difficulties associated with the defendant's wish for separate leases arose but the evidence on this subject is relatively scanty and it is not possible to draw any -- 12 of 15 -- i ( 13 conclusions as to why the delay occurred. Brennan J(as he then was) said in Walton Stores (Interstate) Limited v. Maher (1987-88) 16 CLR 387 at 423: "Parties who are negotiating a contract may proceed in the expectation that the terms will be agreed and a contract made but so long as both parties recognize that either party is at liberty to withdraw from the negotiations at any time before the contract is made, it cannot be unconscionable for one party to do so. Of course, the freedom to withdraw may be fettered or extinguished by agreement but, in the absence of agreement, either party ordinarily retains his freedom to withdraw. It is only if a party induces the other party to believe that he, the former party, is already bound and his freedom to withdraw has gone that it could be unconscionable for him subsequently to assert that he is legally free to withdraw." I am satisfied that no agreement was concluded by the Letter of Intent. As is obvious by the plaintiff's letter of 15 August there were still outstanding matters of some importance. The plaintiff's solicitors were engaged to negotiate the outstanding matters and prepare the formal documents for execution. As I have said earlier, in my view the appropriate conclusion is that the parties did not intend to be bound until this occurred. For the plaintiff to succeed on the issue of estoppel the Court has to be satisfied: (a) That the plaintiff acted to its detriment in performing construction work believing either that there was a concluded lease or that the defendant was bound to conclude a lease. -- 13 of 15 -- • < ( 14 (b) That the defendant by word or conduct induced such a belief and that it would be unconscionable to allow the defendant to act contrary to the belief so induced. Here at least until 5 September the plaintiff could not justifiably have believed that any lease had been concluded and from at least the receipt of the letter of 11 October was aware that the defendant denied the existence of any agreement or any obligation to proceed to an agreement. There is, in my view, nothing in the evidence of the defendant's conduct during the relevant period which would support a finding of the unconscionability necessary if the claim is to succeed. Both parties it seems to me proceeded in the belief that all would be well but I do not think that the evidence justifies a finding under (b) above. Much preparation work was done before terms had been agreed upon and virtually all of the construction work was carried out after the defendant asserted that no contract existed. I am not satisfied that the defendant ever resiled from this position. From the time of the defendant's assertion that no contract existed the evidence would suggest Mr Aylward took the view on behalf of the plaintiff that the defendant had been bound by a contract concluded by the Notice of Intent. In this I find that he was mistaken. The plaintiff's claim therefore must fail. It is necessary to assess damages. The damages are claimed on the basis of one -- 14 of 15 -- ( 15 year's rental in the figure of $82,200 together with rental for the period which would bring it up to the hearing of $12,169.09 together with interest at 5% over the period producing a figure of $5,504.39. Whilst it is accepted that the relevant date as of which the contract was rescinded was 15 December 1997, it is suggested that the plaintiff has failed to mitigate damages by not accepting an offer which was made by a prospective lessee. The evidence did not bear this out. ( \,. . I think that the amount contended for by the plaintiff is not unreasonable and that is the sum to which I have already referred together with an amount of $80,950 representing the present value of one year's rent together with a discounted present value of $12,200 for the next six years representing the difference between the contractual rental and $70,000, a figure which, on the evidence, there is a high likelihood the plaintiff will achieve by way of rental. l I therefore assess damages in the sum of $193,023.48. There will be judgment for the defendant with costs to be taxed. -- 15 of 15 --