Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: DH MB Pty Ltd v Manning Motel Pty Ltd [2014] NSWCA 396
• Hearing dates: 29 August 2014
• Decision date: 20 November 2014
• Before: Meagher JA at [1]; Barrett JA at [34]; Gleeson JA at [35]

Decision

1. Appeal dismissed.

2. Appellants to pay respondent's cost of the appeal.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: CONTRACT - collateral contract - where second appellant promised purchase of room sales as inducement for respondent to enter lease with first appellant - whether intention to create legal relations; CONTRACT - breach of covenant to repair - where lessee had to obtain alternative accommodation - measure of damages
• Cases Cited: Australian Woollen Mills Pty Ltd v The Commonwealth [1954] HCA 20; 92 CLR 424; Calabar Properties Ltd v Stitcher [1984] 1 WLR 287; Ermogenous v Greek Orthodox Community [2002] HCA 8; 209 CLR 95; Gates v City Mutual Life Assurance Society Ltd [1986] HCA 3; 160 CLR 1; JJ Savage & Sons Pty Ltd v Blakney [1970] HCA 6; 119 CLR 435; Masters v Cameron [1954] HCA 72; 91 CLR 353
• Category: Principal judgment
• Parties: DH MB Pty Ltd (First Appellant); DH BI Pty Ltd (Second Appellant); Matthew John Duffy (Third Appellant); Manning Motel Pty Ltd (Respondent)
• Representation: Counsel: A W Street SC with L Tyndall (Appellants); A P Cheshire with S Spadijer (Respondent); Solicitors: Gadens Lawyers (Appellants); Goldrick Farrell Mullan Solicitors (Respondent)
• File Number(s): 2013/357231

Decision under appeal

• Citation: [2013] NSWSC 1582
• Date of Decision: 2013-11-01 00:00:00
• Before: Lindsay J
• File Number(s): 2011/00410040

HEADNOTE

[This headnote is not to be read as part of the judgment]

The first appellant (DHMB) owned the Manning Motel in Bowral (the Manning). The second appellant (DHBI) was the owner and operator of The Briars Country Lodge & Inn (The Briars). The third appellant, Mr Duffy, was the sole director of and shareholder in DHMB and DHBI. Bill Gye and his daughter Julie Gye became directors of the respondent company upon its incorporation. In September 2008, DHMB leased the Manning to the respondent for a term of fifteen years.

The Manning was acquired and renovated as an adjunct to the conduct of The Briars' business. The Briars was an established outlet and had access to the mid-week conference bookings trade in Bowral but insufficient rooms to accommodate it. The appellants looked to the Manning as a means of benefitting The Briars' business. In the course of negotiations between the parties, the Gyes expressed concerns about the viability of the Manning's business, which was yet to be re-established after its closure for renovations. An agent of the appellants made representations to the Gyes that a minimum monthly amount of accommodation at the Manning would be taken by The Briars. There was nothing unusual within the motel/hotel industry about one outlet "purchasing" accommodation at another by means either of a direct purchase or indirectly through the establishment of a connection between a prospective guest and the supplier of the accommodation.

At a meeting on about 27 August 2008, Bill and Julie Gye met with Mr Duffy. At that meeting, Mr Gye said that the respondent would not sign the lease without an assurance that DHBI would take up a certain amount per month in room sales. Mr Duffy replied: "The Briars will take $4,000 per month in room sales from you." Mr Gye then said he would accept that offer and agreed to sign the lease.

The Manning's premises included a manager's residence to which access was obtained via an external stairway. Clause 8.1(c) of the lease provided that DHMB was liable to repair deficiencies in the condition of those stairs. From at least mid-2010, that stairway was not in a good state of repair or condition. Julie Gye was employed by the respondent as manager of the Manning on the basis that she could live in the manager's residence at no expense to her. She and her family obtained alternative rental accommodation between November 2010 and June 2013 because of the unsafe condition of the stairway. The cost of that accommodation, which was borne by the respondent, totalled $76,160.

The respondent brought proceedings against the appellants, claiming breach of the agreement to provide overflow business, and damages from DHMB for breach of its covenant as lessor to keep the motel premises in a good state of repair and condition. The primary judge held that DHBI and the respondent had entered a binding agreement collateral to the lease, by which DHBI promised to purchase $4,000 per month in room sales for the term of the lease in exchange for the respondent entering the lease. The primary judge awarded the respondent $195,055.08 in damages for the breach of that contract. The primary judge also found that DHMB had breached the covenant to repair in relation to the external staircase. He awarded the respondent damages for that breach of $85,123.20.

The issues for determination on appeal were:

(i) Whether by the agreement reached in their conversation of 27 August 2008 the second appellant and respondent intended to create legal relations; and

(ii) Whether the primary judge erred in not awarding the respondent only nominal damages for breach of the covenant to repair.

The Court held (per Meagher JA, Barrett and Gleeson JJA agreeing):

In relation to (i)

1. A collateral contract was formed between DHBI and the respondent. It was constituted by DHBI's offer and its subsequent acceptance by the respondent. That offer was of the promise to purchase $4,000 in room sales per month, if the respondent entered into the lease. It was accepted by the respondent's entry into the lease which also constituted its executed consideration for the making of that promise.

Australian Woollen Mills Pty Ltd v The Commonwealth [1954] HCA 20; 92 CLR 424, applied.

2. The subject matter, context and language of the parties conveyed that if the respondent leased the Manning DHBI was to be bound to the terms of its offered promise to purchase accommodation.

In relation to (ii)

1. The ordinary measure of damages for breach of a covenant to repair is the difference in the value of the premises to the lessee in their present state of repair and what would have been their value to the lessee if the landlord had fulfilled its obligation to repair. That prima facie measure would put the lessee in the position it would have been in had the covenant been performed.

Calabar Properties Ltd v Stitcher [1984] 1 WLR 287, considered.

2. The primary judge did not err in determining the measure of damages to be awarded for breach of the covenant to repair. The evidence indicated that the deficiencies in the condition of the stairway that the covenant required be remedied included deficiencies in their structural condition which made them unsafe to use. Those repairs were not undertaken at any time before the lease was terminated. The evidence also indicated that Julie Gye had moved out of the manager's residence because she considered that the stairs were dangerous. That evidence was sufficient to justify the primary judge's finding that the cost of the alternative accommodation was recoverable.

Judgment

1 MEAGHER JA: The first appellant (DHMB) was at all relevant times the owner of the Manning Motel in Bowral (the Manning). By an agreement dated 16 September 2008, DHMB leased that motel to the respondent for a term of 15 years commencing on 22 September 2008 and ending on 21 September 2023. That lease was terminated in June 2013.

2 At the time the lease was entered into, the second appellant (DHBI) was the owner and operator of the The Briars Country Lodge & Inn (The Briars), which also is in Bowral. At the same time, the third appellant (Mr Duffy) was the sole director of, and shareholder in, DHMB and DHBI.

3 In proceedings brought by the respondent, the primary judge (Lindsay J) held that as an inducement to the respondent entering into the lease, Mr Duffy on behalf of DHBI promised the respondent that if it did so, DHBI as operator of The Briars would purchase $4,000 per month in room sales from the respondent during the term of the lease: Manning Motel Pty Limited v DH MB Pty Limited [2013] NSWSC 1582 at [64]. By entering into the lease, the respondent accepted that offer, thereby constituting a binding agreement. The damages awarded to the respondent for breach of that collateral agreement were $195,055.08 inclusive of pre-judgment interest: [119].

4 The respondent also claimed damages from DHMB for breach of its covenant as lessor to keep the motel premises in a good state of repair and condition. The primary judge held that there was a breach of this covenant in relation to the external wooden staircase which provided access to the manager's residence at the Manning: at [90]. His Honour awarded the respondent damages for that breach of $85,123.20 inclusive of pre-judgment interest: [119]. DHMB and DHBI appeal from those judgments.

Issues in the appeal

5 There are two issues in the appeal. The first, raised by grounds 1 to 7 of the amended notice of appeal, is whether the primary judge erred in holding that by their consensus reached in a conversation that occurred on about 27 August 2008, DHBI and the respondent intended upon the respondent's entry into the lease to make a binding agreement for the purchase of room sales. The second issue, raised by grounds 9 and 11, is whether the primary judge erred in awarding the respondent other than nominal damages for breach of the covenant to repair. Grounds of appeal 8, 10 and 12 are not pressed.

6 It is convenient first to address the issue concerning the collateral agreement which was held to have been made by the entry into the lease.

The collateral agreement: intention to create contractual relations

7 The agreement pleaded by the respondent was that in early September 2008 DHBI promised that if the respondent entered into a lease with DHMB and provided DHBI with accommodation at the Manning at discount rates for overflow customers of The Briars, DHBI would purchase a minimum of $4,000 accommodation per month during the term of the lease (further amended statement of claim para 4A).

8 By its defence, DHBI denied entering into an agreement in those terms but admitted entering into a separate and unrelated agreement to include the respondent on a list of preferred hotels used by DHBI to refer customers when it was unable to accommodate the overflow of The Briars' customers from time to time (defence to further amended statement of claim, paras 4 and 5).

9 At the hearing, the principal issue in relation to the respondent's claim for breach of agreement was as to the terms of the agreement made which, as the primary judge observed at [48], focused attention on "what was said and agreed".

10 A commercial property agent (Mr Larkin) was retained to lease the Manning. Before the primary judge, there was no question either as to his authority to make representations on behalf of DHMB and DHBI concerning the availability of overflow business from The Briars or as to the fact that Mr Duffy had authority to speak on behalf of the entity which owned and operated The Briars. Also it was not in contest before the primary judge that, although not specifically identified at the time of the negotiations, DHBI was that entity. During the course of argument of the appeal this question was raised, but ultimately was not pressed in the face of the admission made in the pleadings and the way the trial was conducted.

11 In June 2008, Mr Larkin met with Bill Gye and his daughter, Julie Gye, and his son, Steven Gye. At that time the respondent company had not been incorporated. Bill Gye and his daughter became directors of the respondent when it was incorporated in late July 2008. On about 27 August 2008, they met with the third appellant at the Manning. Mr Duffy's email sent later on that day records that he had "just made a final inspection of the Manning Motel with Bill and Julie".

12 The primary judge accepted the evidence of Bill Gye and his daughter and son as to their conversations with Mr Larkin and Mr Duffy concerning the overflow business. That evidence, as recorded by his Honour at [49], was to the following effect:

"(a) On or about 10 June 2008 Mr Gye Senior, his daughter Julie and his son Steven met with Mr Larkin at the site of the Manning, in the course of which the Gye Family (representing the plaintiff) expressed concerns about the viability of prospective business operations at the Manning (yet to be re-established after closure of the motel for renovations effected by the defendants) and Mr Larkin said words to the following effect:

"In addition to [income figures set out in the agent's Listing Details sheet] The Briars will purchase at least $60,000 per year in accommodation from the Manning for their overflow and maybe a lot more.... The Briars and the Manning are inextricably linked. The Manning should not be considered as a stand-alone business. The Manning operates to satisfy the accommodation needs of The Briars Convention Business and without such convention accommodation business to send to the Manning, the owners would not be opening it. The $60,000 in trade that The Briars will send the Manning is guaranteed".

(b) On or about 11 June 2008 Mr Gye Senior had a telephone conversation with Mr Larkin to the following effect:

Mr Gye said: "Where does this figure of $60,000 room sales from The Briars you mentioned... come from? It's not in your income assessment [in the Listing Details Sheet]".

Mr Larkin said: "The directors of the Briars [sic] have each told me to make this offer known to all enquirers to the Manning Lease".

Mr Gye said: "Did they tell you this when they were together?"

Mr Larkin said: "Each one told me this separately".

(c) On or about 13 June 2008 Mr Gye Senior (then contemplating taking a lease of the Manning through another corporate vehicle of the Gye family other than the plaintiff) said to Mr Larkin words to the following effect: "We will go ahead on the lease on the understanding that The Briars take the $60,000 in accommodation per year".

(d) On or about 27 August 2008 Mr Gye Senior and his daughter Julie (again representing the plaintiff) met the third defendant (a director, and the controlling mind, of both the first and second defendants) at the property, during the course of which an exchange between Mr Gye Senior and the third defendant to the following effect took place:

The third defendant said: 'When are you going to sign the Lease?'

Mr Gye said: 'We will not sign the Lease unless we have your assurance that you will take up the $5,000 per month in room sales that has been promised.'

The third defendant then said: 'The Briars will take $4,000 per month in room sales from you.'

Mr Gye said: 'Very well, we'll accept that and I'll sign the Lease when it is ready.'"

13 His Honour found at [64] that "with the intention that the [respondent] would rely upon its promise, [DHBI, by Mr Duffy] promised the [respondent] that, if the [respondent] executed the lease, [DHBI] (as the operator of The Briars) would take $4,000 per month in room sales from the [respondent], as the operator of the Manning, throughout the duration of the lease" and that the respondent executed the lease in reliance upon that promise and would not have done so but for that promise. He concluded that the respondent's entry into the lease agreement gave rise to a contract which was collateral to the lease.

14 Although his Honour did not expressly say so, that contract was constituted by DHBI's offer and its subsequent acceptance by the respondent. The offer was of the promise to purchase $4,000 room sales per month, if the respondent entered into the lease. That offer was accepted by the respondent's entry into the lease which also constituted its executed consideration for the making of that binding promise: Australian Woollen Mills Pty Ltd v The Commonwealth [1954] HCA 20; 92 CLR 424 at 456-457 (Dixon CJ, Williams, Webb, Fullagar and Kitto JJ).

15 DHMB submits that the primary judge did not consider whether, in the circumstances, the parties were to be taken to have intended to create to create legal relations. Had he done so, it is said the primary judge should have concluded the parties' conduct did not objectively convey such an intention. In making that submission, DHMB does not challenge the primary judge's findings as to the consensus reached between the parties, as to the terms of that consensus and as to those terms being sufficiently certain as to be capable of giving rise to a legally enforceable agreement.

16 Several arguments were made in support of the proposition that there was no intention to create legal relations. It was pointed out that the subject matter of the alleged agreement was a promise to purchase accommodation of $48,000 per year for the duration of the 15 year lease plus any period of renewal. It was said that if the parties intended to make an arrangement involving such a significant financial commitment on the part of DHBI, one would have expected it to have been recorded in writing. This was particularly so in circumstances where, at the time it was made, the solicitors for the parties were negotiating the "minutiae" of the lease and continued to do so until it was signed in mid-September. Reference was made to the absence of any specification, in relation to the arrangement which was made, as to the rates at which the room sales would occur, as to how the monthly amount of $4,000 would be invoiced and paid and as to whether it was to include GST. Whilst the omission of the parties to make express reference to these matters did not deprive their arrangement of the requisite certainty, it was said to be an indication that they were not intending to be legally bound. Reference also was made to the absence of any express identification of DHBI as the owner and operator of The Briars in any of the conversations found by the primary judge. Again the lack of attention to such detail was relied upon as indicating a lack of the requisite intention.

17 As the primary judge noted at [47], to establish a collateral contract of the kind relied upon, it was necessary for the respondent to show that the parties objectively intended that the statement "The Briars will take $4,000 per month in room sales from you" was a promise offered by DHBI in consideration for the respondent's entry into the lease with DHMB: Australian Woollen Mills Pty Ltd at 461; JJ Savage & Sons Pty Ltd v Blakney [1970] HCA 6; 119 CLR 435 at 442 (Barwick CJ, Kitto, Menzies, Owen and Walsh JJ); Gates v City Mutual Life Assurance Society Ltd [1986] HCA 3; 160 CLR 1 at 5 (Gibbs CJ).

18 At trial it was not contended by the appellants that the parties were not to be taken, by their conversations between June and August 2008, to have intended to enter into a binding agreement with the operator of The Briars concerning its overflow custom. On the contrary, DHBI admitted the existence of such an agreement albeit one on terms which only required it to refer customers when it was unable to accommodate them. Nor was the issue presented to the primary judge whether the parties intended to be bound as a result of their consensus reached on 27 August 2008 rather than at some future time when a document recording the terms of their arrangement was brought into existence and executed: often described as a Masters v Cameron [1954] HCA 72; 91 CLR 353 dispute. That being the position, it is not surprising that the primary judge did not expressly consider whether the subject matter of the agreement and the relationship between the parties and other surrounding circumstances assessed objectively showed that they intended to create legal relations: see the discussion of this general issue in Ermogenous v Greek Orthodox Community [2002] HCA 8; 209 CLR 95 at [24], [25] (Gaudron, McHugh, Hayne and Callinan JJ).

19 The primary judge addressed whether Mr Duffy's promissory statement was intended to constitute a binding promise offered in consideration for the entry into the lease by reference to what was objectively conveyed by what the parties said and did. In doing so, he made a number of findings concerning the context in which the relevant conversation occurred.

20 Those findings, which are not challenged on appeal, include the following. The Manning had been acquired and renovated as an adjunct to the conduct of The Briars' business. Mid-week conference bookings were an important feature of the motel/hotel trade in the Bowral area and, as an established and popular outlet, The Briars had access to that trade but insufficient rooms to accommodate it. For that reason the appellants looked to the Manning as a means of benefitting The Briars' business. For the same reason, the respondent took comfort in the assurances given by Mr Larkin and Mr Duffy about a guaranteed source of critically important mid-week business to the Manning: [55].

21 The statements as to the availability of overflow business were made in circumstances where the respondent had sought assurances which reflected the critical importance of the availability of that business to its preparedness to lease the Manning: [61]. Finally, within the motel/hotel industry there was nothing unusual about one outlet "purchasing" accommodation at another by means either of a direct purchase or indirectly through the establishment of a connection between a prospective guest and the supplier of the accommodation: [63].

22 Thus before the meeting on 27 August 2008, the respondent had expressed concerns as to the viability of the business of the Manning. At the meeting Bill Gye sought and obtained assurances that a minimum monthly amount of accommodation would be taken by The Briars. At the same time, he made clear that he would not enter into the lease unless such an assurance was given. Mr Duffy's assurance that "The Briars will take $4,000 per month" was promissory in form and given to induce entry into the lease. Bill Gye's statement that he would "accept that" promise and sign the lease when it was ready confirmed an undertaking that what was offered was a binding promise given in return for entry into the lease.

23 The primary judge did not err in concluding that the parties intended to create a binding agreement. Each of the matters relied upon by the appellants might, in different circumstances, have indicated a want of such an intention. However, here the subject matter, context and language of the parties conveyed that DHBI was to be bound to the terms of its offered promise to purchase accommodation if the respondent leased the Manning. There was no need for the parties to record their agreement in writing. It was not complicated or lacking any detail necessary to give it sufficient certainty; and was an arrangement that also would benefit The Briars. Finally, by its defence DHBI admitted that by its oral communications with the respondent it intended to give rise to some form of legally binding arrangement. That defence was never withdrawn. For these reasons, grounds of appeal 1 to 7 must be rejected.

Breach of covenant to repair: award of damages

24 The Manning's premises included the manager's residence to which access was obtained via the external wooden stairway. The primary judge concluded that the stairway "was not in a good state of repair or condition at any time from at least mid-2010": [90]; that under cl 8.1(c) of the lease, DHMB was liable to repair deficiencies in the condition of those stairs: [96]; and that the respondent was entitled to damages for breach of that covenant for the period from mid-2010 to June 2013. That finding of breach is not challenged on appeal.

25 The ordinary measure of damages for breach of a covenant to repair is the difference in the value of the premises to the lessee in their present state of repair and what would have been their value to the lessee if the landlord had fulfilled its obligation to repair. That prima facie measure would put the lessee in the position it would have been in had the covenant been performed. The relevant principles are discussed by the English Court of Appeal in Calabar Properties Ltd v Stitcher [1984] 1 WLR 287. There, the tenant had to rent alternative accommodation after the premises became uninhabitable because of the landlord's beach of a covenant to repair. In relation to the tenant's counter claim for damages for breach of that covenant, Stephenson LJ observed at 291:

"It is true that while the defendant was not living in the flat because of the plaintiffs' breach of contract she was not getting anything for the rates etc. which were payable under the lease. But she had not terminated the lease and had to pay outgoings on some property, and I would regard the costs of the property which she rented as alternative accommodation for herself and her husband in the Isle of Man as prima facie the loss suffered by being kept out of her flat for the period of the plaintiffs' continuing breach of covenant, subject to the renting of that alternative accommodation being reasonable."

26 Julie Gye was employed by the respondent as manager of the Manning on the basis that she could live in the manager's residence at no expense to her. She gave evidence that because of the unsafe and dangerous condition of the stairway, she and her family had to find alternative rental accommodation in the period between November 2010 and June 2013. The respondent bore the cost of that accommodation. The primary judge accepted that evidence and awarded the respondent as damages the cost of securing that alternative rental accommodation which totalled $76,160: [97], [98].

27 Four grounds of appeal were directed to that award of damages. Grounds 10 (the primary judge erred in failing to find that the respondent failed to mitigate its damages) and 12 (the primary judge erred in reducing the damages recoverable because the respondent had refused to permit the landlord access to carry out the required repairs) are not pressed. Neither of those arguments was pleaded or made before the primary judge and, accordingly, could not be advanced on appeal. The remaining grounds are grounds 9 (the primary judge erred in finding that the respondent suffered actual loss or damage by reason of the breach of covenant) and 11 (the primary judge should have held that any damages recoverable in relation to the breach of covenant were nominal).

28 In its written and oral submissions, the first appellant advanced the following propositions in support of those grounds. First, it said that the cost of repairing the stairs in September 2012 was $295 and did not include any deficiencies in their structural condition which were not required to be remedied under the covenant to repair. Secondly, it submitted that neither of the reasons identified by Julie Gye for her having to find alternative accommodation related to any condition of the stairs which resulted from a breach of the covenant to repair. In relation to this second submission, the reasons referred to were identified as the "structural state of the stairs" and the fact that they became wet and slippery in adverse weather conditions. Neither of these submissions identifies any error on the part of the primary judge of the kind to which grounds 9 and 11 are directed.

29 As to the first submission, the primary judge found that the stairway was not in a good state of repair or condition at any time from at least mid-2010: [90]. That finding is not challenged on appeal. The evidence which supported it included two WorkCover Authority improvement notices, one issued in June 2010 and the other in July 2011 and a building defects report dated 28 September 2012. The latter described the stairs when inspected on 26 September 2012 as "un-safe" and described their deficiencies as including that balustrades were missing on one side of the stairs, that the stair risers were of variable heights and that the stair treads were not seated within the side piece of the stairs, with the result that there was a risk that the treads might collapse whilst in use. Mr Duffy's evidence was that some repairs were carried out to the stairs in September 2012, but before the defects inspection of 26 September 2012. He agreed that the repairs which were undertaken were the subject to the landlord's covenant to repair.

30 Two things follow from the evidence. The first is that the deficiencies in the condition of the stairway that the primary judge held were required to be remedied under the covenant included deficiencies in their structural condition which made them unsafe to use. That conclusion of the primary judge is not challenged by either of the grounds which are pressed. The second is that those repairs were not undertaken at any time before the lease was terminated.

31 As to the second submission, Julie Gye's evidence was that she moved out of the manager's residence because she considered that the stairs were dangerous. She described the respects in which the stairs were dangerous as including that there was a bannister missing on one side and that the treads were of uneven spacing. That evidence and the earlier finding as to the nature of the breach were sufficient to justify the primary judge's finding that the cost of the alternative accommodation was recoverable. It was not contended that the renting of that alternative accommodation was otherwise unreasonable. It might also be added that, contrary to the appellants' submissions, the fact that the stairway was external and at times may have become wet and slippery was a matter to be taken into account when considering whether its structural state, and in particular its having a bannister or balustrade missing, made it dangerous or more dangerous.

32 For these reasons grounds 9 and 11 are rejected.

Conclusion

33 The appeal should be dismissed with costs.

34 BARRETT JA: I agree with Meagher JA.

35 GLEESON JA: I agree with Meagher JA.

Decision last updated: 20 November 2014