In recent times, there has been significant litigation over developers relying upon sunset clause to terminate contracts. Usually, such terminations rely upon the developer’s rights to do so in express provisions.
In 2 cases heard together, the Queensland Supreme Court looked carefully at the express terms of contract and found that the contracts were valid and the developers bound to settle.
In Malligan v Chevron Apartments Pty Ltd and Cantavenera and Salonia v Chevron Apartments [2006] QSC 195, Freeburn J considered the express terms of the developer’s contract, and found in favour of the buyers.
Must
The contract contained the following provisions:
10.1 The buyer acknowledges that:
(a) Settlement of this Contract is subject to and conditional upon:
(i) recording of the CMS and the Plan;
(ii) the issue of a Certificate of Classification;
(iii) establishment of the Scheme; and
(b) as at the Contract Date the Scheme has not been established.
10.2 Subject to clause 16 and the Buyer complying with its obligations under clause 11.4(a),[4] [Chevron] must establish the Scheme, register the Plan and effect Settlement under this Contract by the Sunset Date.
In considering this wording, Freeburn J found the word “must” compelling and used in a deliberate way.
A reasonable business person
He applied a test of what a “reasonable business person “would understand the term to mean and that such an enquiry required objective consideration of :
- the language used by the parties in the contract,
- the circumstances addressed by the contract and
- the commercial purpose or objects to be secured by the contract.
Further, in looking at the clause as an objective business person, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
Intention to produce a commercial result
Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties … intended to produce a commercial result”. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.[
Taking advantage of own wrong
A further consideration as a general rule of interpretation is that a party in breach of a contract may not take advantage of that party’s own wrong.
In this case, the developer had failed to comply with its obligations under Cl 10.2- to establish the Scheme ,register the Plan and effect Settlement …by the Sunset Date”
Developer’s Arguments to read down the clause rejected
Chevron’s arguments to read down the mandatory terms of Clause 10.2 were rejected.
Implying terms of “reasonableness” and “best endeavours” were rejected in the face of a mandatory “must” term.
Further,
“recourse to events, circumstances and things external to the contract may be necessary in determining the proper interpretation of the contract where there is a constructional choice. But here, there was no genuine constructional choice. The words of the clause are plain. And, the clause expressly referred to and preserved Chevron’s rights under clause 16, a clause which gave Chevron extensive rights to terminate. Chevron was entitled to decide not to proceed with the project in a wide range of circumstances, including if the project was or became unviable as a business proposition. The uncertainty of the COVID-19 era was well catered for by clause 16. The uncertainty of that era does not provide a proper explanation for reading down clause 10.2 so that it has a meaning at loggerheads with its plain meaning.”
Relevantly, Clause 16.2 provided:
16.2 Termination for other reasons
(a) Subject to clause 16.2(b), [Chevron] may terminate this Contract by written notice to the Buyer where:
(i) the relevant Local Government or any other Authority has failed to grant, on conditions satisfactory to [Chevron], an approval required in connection with the Scheme Land, the Development, the sealing of the Plan or construction of the Apartments in the Development;
(ii) the Local Government refuses to issue a Certificate of Classification in respect of the Lot;
(iii) a substantial part of the Development is destroyed or substantially damaged before the Settlement Date;
(iv) [Chevron] has decided not to proceed with the Development because [Chevron] is unable to obtain sufficient finance to carry out the Development on terms satisfactory to [Chevron] in its absolute discretion;
(v) [Chevron] has decided not to proceed with the Development because of an insufficient number of proposed Scheme lots being sold. [Chevron] will determine in its absolute discretion whether the number of lots sold are sufficient. For the purpose of this clause 16.2(a)(v), ‘sold’ means when a lot is subject to an unconditional contract of sale;
(vi) [Chevron] has decided not to proceed with the Development because of construction costs increasing so as to result in the carrying out the Development being financially unviable to [Chevron];
(vii) [Chevron] has decided, on reasonable and justifiable grounds, not to proceed with the Development; or
(viii) prior to the commencement of the Works, [Chevron] decides not to proceed with the Development for Viability Reasons.
No “Material Prejudice” to Buyers
In this building, there was evidence that construction was largely completed, except for some landscaping and fit-out.
Chevron also relied on section 214 of the Body Corporate and Community Management Act 1997 (Qld) and clause 25(c) of the contracts asserting that there was material prejudice to the Buyers by reason of a number of ongoing construction issues and increased body corporate contributions. The buyers both rejected that they were materially prejudiced and the court dismissed this argument.
The concept of ‘material prejudice’ in section 214 was considered by the Queensland Court of Appeal in Mirvac Queensland Pty Ltd v Wilson. There, Jones J (with whom McMurdo P and Fraser JA agreed) quoted with approval the primary judge’s summary of the principles as to what was “material prejudice”:
(a) The focus is on the buyer. This suggests that the test is objective having regard to the particular buyer’s circumstances: would someone in those circumstances be materially prejudiced?
(b) Given that the buyer has only 14 days in which to cancel the contract, and the completion date may still be some months away (as it was in this case), material prejudice must be assessed in the light of the buyer’s circumstances when the Further Statement is received or at the latest at the expiration of 14 days from its receipt.
(c) There must be a causal relationship between the inaccuracy and the prejudice.
(d) There must be proportionality between the inaccuracy and the prejudice.
(e) Because this is consumer protection legislation, it should be construed beneficially.
In substance, a person is “materially prejudiced” if they are disadvantaged substantially or to an important extent.
Decision
After consideration of the issues, the Court declared that the contracts remained valid and binding on the parties.
This is another important win for buyers seeking to enforce contracts terminated by developers.
As an aside-there was significant capital gain in the value of the units from date of contract to the date of the purported termination.
The ability of buyers to enforce contracts against termination under a sunset clause appears to be widening, but as always-the specific wording in the contracts and circumstances determine the outcome.
For any assistance in termination or enforcing a contract of sale-please contact Michael Sing, Rostron Carlyle Lawyers.
Disclaimer: This publication is intended to provide general information only and does not constitute legal advice. Specific legal advice should be obtained based on your individual circumstances.
