Tigers thump their retail landlord and Port Adelaide on the same day

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Dusty Martin’s reaction to the Court of Appeal’s judgment

Richmond Football Club had two big wins on Friday – one over Port Adelaide in the preliminary final and the other over a retail landlord in Victoria’s Court of Appeal.

One result gets the Tiges into the 2020 Grand Final; the other should win them lots of new fans among Victoria’s retail tenants.

The Court of Appeal’s decision is Verraty Pty Ltd v Richmond Football Club Ltd [2020] VSCA 267.

In short, it allows Richmond to rely on the Retail Leases Act (‘the Act’) to save a mountain of land tax and prune back some rent increases (the precise monetary consequences are not set out).

The decision confirms that a ‘retail premises lease’ once entered or renewed will not change its legal character during its term by reason of extraneous circumstances (such as rent increases). This is important because the Act gives various protections to tenants of ‘retail premises’ including (at s. 50) voiding any requirement in a lease that the tenant effectively pay its landlord’s land tax. These protections commonly make the question of whether a particular lease relates to ‘retail premises’ within the meaning of s. 4 of the Act financially significant for tenants and landlords.

The Act’s definition of ‘retail premises’ focuses on the retail supply of goods and services but it has several carve-outs. One of the exclusions is that premises with ‘occupancy costs’ of over $1 million per year are not ‘retail premises’. But what happens if the proper categorization of premises as ‘retail premises’ changes during the life of a lease?

This was the issue that arose between Richmond and its landlord, Verraty.

Since (at least) 2004, Richmond had leased a Wantirna pokies venue from Verraty. In 2004 the venue constituted ‘retail premises’ within the meaning of the Act.The written lease included a requirement that the tenant reimburse the landlord its annual land tax but, because the lease was a ‘retail premises lease,’ that requirement was unenforceable by reason of s. 50 of the Retail Leases Act.

Over time the property’s rent and outgoings increased. By May 2016 the tenant’s annual occupancy costs ticked over the $1 million mark. Did the fact that the occupancy costs now exceeded $1 million mean that the premises ceased to be ‘retail premises’ within the meaning of the Act and that the hitherto-void land tax clause hence suddenly became enforceable against Richmond?

The landlord took that argument to VCAT and won – see Verraty v Richmond Football Club [2019] VCAT 1073.

Richmond then appealed to the Supreme Court (Croft J in his final case before retirement from the bench) and won – see Richmond Football Club v Verraty [2019] VSC 597.

Verraty then appealed to the Court of Appeal. There Justices Kyrou, Kaye and Sifris dismissed Varraty’s appeal in a joint judgment. The nub of it is in para 8:

“… if a lease is a ‘retail premises’ lease at the commencement of the lease, it remains subject to the Act even if the premises cease to be retail premises. In short, the text, context and purpose of the Act strongly support the view that it is not possible [for a lease] to jump in and out of the Act from time to time depending on whether the premises continue to fall within the definition of ‘retail premises’.

The judgment is a ringing vindication of Croft J’s final Supreme Court judgment but it is silent on the question of whether leasing relationships can ‘jump’ in or out of the Act when leases are renewed (cf during a lease term). This question did not squarely arise in the Richmond v Verraty matter but Croft J nevertheless ventured an opinion on it in his judgment. He suggested (at paras 74 – 78) that whether premises could change their ‘retail premises’ characterization upon renewal of a lease depended upon the lease provisions regarding such renewals.

The Court of Appeal does not look at this question but it certainly approved of Croft J’s analysis generally.

Conclusions? Three occur to me.

  1. It is now settled that whether a lease is or is not a ‘retail premises lease’ is established on a ‘once and for all’ basis upon its entry or renewal. Its character won’t change during its term.
  2. It is less clear whether a lease can ‘jump’ upon renewal of a lease. For example, ‘retail premises’ under the Act exclude premises whose tenants are listed on the ASX. Despite this, Verraty suggests that the retail premises lease for a ‘Mum and Dad’ business will continue to be a retail premises lease even where the tenants sell their business and assign their lease to an ASX-listed company during the life of that lease. So if that ASX-listed assignee then exercises an option to renew the lease, what is the status of the resulting further term? Croft J implies the answer depends on the terms of the lease involved. The Court of Appeal does not express a view.
  3. Richmond is going into Grand Final Week on a winning streak on and off the field. This might be a bad omen for Geelong.

Time for a second wave of rent relief applications? Meet Victoria’s amended Covid-19 commercial leasing regime

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Victoria’s commercial leasing goalposts moved again last week with new regulations tweaking the Commercial Tenancy Relief Scheme (“CTRS”). As a result, most commercial tenants should probably now be making fresh rent relief applications to their landlords.

By way of background, I blogged about the original CTRS in May (see here). But in short, the CTRS is part of a national scheme to spread the financial pain of the Covid-19 pandemic between commercial landlords and their tenants. The newly updated Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“the Amended Regulations”) extend the CTRS until 31 December 2020 (see reg. 25 and the definition of ‘relevant period’) but they also do much else.

Here are four key changes I perceive in the Amended Regulations.

1. Fresh rent relief requests might now be necessary.

As in the original version of the CTRS, a commercial tenant will qualify for rent relief only if, first, it has an ‘eligible lease’ (which involves, among other things, participation in the Commonwealth’s ‘JobKeeper’ scheme) (see reg. 10(2)(b)) and, second, it makes a written request for rent relief that complies with reg. 10. The wrinkle is that reg. 10 was changed by last week’s amendments, and the information prescribed for the tenant’s request is now greater than before. One example of the effects of the changes to reg. 10 is that a tenant’s written rent relief request to a landlord could comply with reg. 10 on 28 September 2020 without specifying the tenant’s decline in turnover as “a whole percentage”. On 29 September 2020 that same written request would not have complied with the (newly amended) reg. 10.

This is problematic for several reasons. The Amended Regulations were made on 29 September 2020 but “are taken to have come into operation on 29 March 2020” (reg. 3). Put another way, the Amended Regulations’ commencement pre-dates their very publication by precisely 6 months. So is our hypothetical tenant’s compliant rent relief request of 28 September 2020 still valid today? (Think of all the billable hours likely to be exhausted exploring this question.)

Even assuming this particular absurdity can be safely navigated in our hypothetical tenant’s favour (and I think it can be only partially), what is the status of tenants’ pre-29 September rent relief requests for post-29 September 2020 rent if their earlier rent relief requests do not comply with the 29 September 2020 version of reg. 10? (Reg. 10(4)(a) implies that a landlord is under no obligation to give its tenant rent relief for any period before the landlord receives a written request from the tenant that conforms with the reg. 10(1).)

The Small Business Commission is central to the administration of the CTRS. It has already noticed this complication and sought to deal with it by publishing this template rent relief request for tenants to send to their landlords. It is feasible that some tenants will have already accidentally provided their landlords all the information prescribed by the new reg. 10, but such serendipitous advance compliance is likely to be rare. As the tenant’s compliant written request is both important and free, most tenants will probably be best served by completing the SBC’s template document asap and firing it off to their landlords. Every day they delay is potentially costing them rent relief to which they are otherwise entitled.

Back in April, the National Cabinet published the Mandatory Code of Conduct Contrary on SME Commercial Leasing Principles during Covid 19. That document created an expectation (but no actual legal requirement) that landlords would grant rent relief which was at least proportionate to their commercial tenants’ loss of turnover. That expectation was not reflected in Victoria’s original CTRS regulations. Confusion ensued. This has now changed. The Amended Regulations do have such a proportionality requirement (see reg. 10(4)(ba)). Landlords must offer their tenants within 14 days of a compliant request, rent relief “at a minimum, proportional to the decline in the tenant’s turnover” associated with the rented premises.

2. Proportional rent relief as a minimum is now unambiguous.

Note that the proportional rent relief is a minimum rather than a fixed empirical requirement – a tenant might legitimately and candidly argue for a higher percentage of rent relief than the loss of turnover it has actually experienced.

The Amended Regulations maintain the original CTRS requirement that, unless otherwise agreed by the tenant, rent relief (whatever the amount) will be granted by landlords permanently waiving one half of the rent relief amount (see reg. 10(4)(b)) with the balance of the rent relief to be dealt with by way of deferral (see reg. 16(2)) or otherwise.

3. Even stony broke landlords are now required to donate blood to their haemorrhaging tenants.

The original CTRS regulations included (at reg. 10(4)(d)(iv)) an effective requirement that rent relief be calculated by reference to factors including “a landlord’s financial ability to offer rent relief”. Regulation 10(4)(d)(iv) has been deleted by the Amended Regulations. The potential effect is that some cash-strapped landlords might now be compelled to provide rent relief to their tenants even where that rent relief is likely to drive those landlords to insolvency.

4. A pseudo fix to jawboning as a delay tactic?

The very foundation of the original CTRS was that a qualifying tenant could not be evicted for non-payment of rent until the revised CTRS rent had been either agreed or fixed by VCAT. In my May blog I perceived a scenario where a cynical tenant might go on an effective rent strike under the pretext that it was negotiating with the landlord while knowing that the growing queue of litigants for a (largely shut-down) VCAT meant that those “negotiations” might drag on inconclusively for years. The Amended Regulations now offer tenants (but not landlords) the near-term possibility of obtaining from the Small Business Commission a binding order for rent relief (see Division 1A of the Amended Regulations). Such binding orders are likely to be relatively quick (at least compared to the VCAT route) and might be useful to some tenants requiring short term certainty (e.g. for business sales, partnership dissolutions, etc) but most tenants are likely to find them very unattractive for several reasons.

The most obvious disincentive to a tenant seeking a binding order is strategic. If a tenant has effectively suspended its landlord’s ability to evict it for non-payment of rent pending a very distant adjudication by VCAT, why would that tenant want to disrupt the status quo by seeking a binding order from the Small Business Commission? It sounds to me a bit like Roadrunner proposing a coin toss to Wyle E Coyote – essentially foolhardy.

And a landlord’s equivalent near-term options if rent relief negotiations reach an impasse? Scant indeed, on my reading of the Amended Regulations.

There are many other oddities in the Amended Regulations. These are surely not the last amendments to the CTRS that we will see.

For whom the Bell tolls

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Alan Bond (pre-Bell collapse, fraud conviction and bankruptcy) with a mate

There is something uplifting in properly farewelling the dead and the dying.

The Economist’s weekly obituary always floats my boat (here is its recent goodbye to Ruth Bader Ginsburg as a sample). Ditto almost anything from Nick Cave’s vast anthology of dirges (including the Sydney Opera House’s spine-tingling cover of The Ship Song). Gabrielle Faure’s Requiem is my perfect breakfast soundtrack (although it does cause my family to fling toast at me).

Maybe Master Sanderson of the Western Australian Supreme Court has similar tastes.

He has just added a nine paragraph Corporations Law judgment to the genre. It’s beautiful.

In a mere 675 words he retells the story of the Bell litigation which is now being laid to rest after 25+ exhausting years, makes some final formal orders, and even includes some wry funnies along the way.

It might well be the very first and last Corporations Law judgment you actually enjoy reading from start to finish.

Here it is: Bell Group (UK) Holdings Ltd (in liq) [2020] WASC 347.

And to give it context, here is the ABC’s take on the wider saga.

Cashing in on a sense of entitlement – another intriguing TFM tale

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From East St Kilda to Malvern via Tajikistan

Looking for an exotic read that traverses East St Kilda, L.A., London, Afghanistan and Malvern? Or researching the outer reaches of “disentitling conduct” in dysfunctional families for the purposes of Victoria’s testator family maintenance (TFM) regime?

Either way, take a look at Joss v Joss [2020] VSC 424 which was decided by Justice Elizabeth Hollingworth in the Supreme Court this month.

The deceased was an orthodox Jewish survivor of the Holocaust. He died aged 93 in 2017, leaving the entirety of his $12.4 million Australian estate to his wife of 61 years. The couple’s two children stood to inherit under Dad’s will if Mum predeceased him but as Mum survived Dad, they got nothing under Dad’s will.

One son apparently accepted this but his brother did not. That son – a 61 year-old now named “Jessica” (s/he has long been planning gender reassignment surgery) sued the estate under Part IV of the Administration and Probate Act claiming her father had a “moral obligation” to make adequate provision for her proper maintenance and support and had failed in that duty. Jessica initially claimed 100 per cent of the estate but whittled that claim back to between 30 and 45 per cent by the end of the trial.

What had the plaintiff done to deserve such munificence from her late father (and at the expense of the deceased’s widow, Jessica’a own mother)?

Here are just some of the highlights from Jessica’s resume:

  • After being expelled twice from the same school Jessica received a commerce degree from Melbourne Uni. She then worked in banking and finance in Sydney and London for a few years.
  • In 1989 Jessica briefly joined the US Marines but didn’t make it through boot camp.
  • She then moved home to East St Kilda where the deceased bought her an apartment in her own name and employed her in the family business.
  • Along the way, Jessica stole some of the deceased’s share certificates and bought herself a luxury car with the proceeds.
  • In 1998 the deceased started paying Jessica an allowance of $500 per month. That allowance never stopped (even after the deceased’s death) and by the time of the trial had grown to $1600 per week (i.e. $83,000 annually tax-free) plus miscellaneous extra payments from time to time.
  • In 1999 Jessica quit work at the family business and (on her own version) chose never to work again. She lived off her parents’ money thereafter.
  • At about the same time, she abandoned the St Kilda apartment she’d been given to stand empty while she took off to Tajikistan hoping to fight in Afghanistan.
  • She developed strong anti-Jewish, pro-Muslim views. She also attempted to get a job working with the Iranian government.
  • She boasted to friends that she was joining Al Qaeda.
  • She repeatedly demanded millions from her parents (as an “advance on her inheritance”) and threatened to kill herself if they refused.
  • She repeatedly embarrassed her parents publicly and privately.
  • She acquired a cross-bow and was arrested after threatening to kill the deceased with it at the family’s synagogue.
  • She accepted a brand-new car from the deceased in 2014 and never saw him again before he died three years later.
  • As at the date of trial (in Hollingworth J’s words): –
    • “Jessica’s life has essentially been on hold for 20 years, as she stubbornly waits for her parents to pay for the [gender reassignment] surgery that she would have been capable of saving for, and paying for, herself at various times during that period.”
    • “Jessica’s parents have furnished at least three previous homes for her over the years; she has either sold or abandoned all of the furniture.”
    • Jessica has “no superannuation, savings or substantial assets” and no dependents “except for an elderly cat”.

So did the deceased have a “moral duty” to make provision for Jessica in his will?

Too right, said Hollingworth J.

“By continuing to support Jessica for all those years, [the deceased] allowed her to become financially dependent on him, and to lose much, if not all, of her capacity for employment. This is the most important consideration in my conclusion that [the deceased] did owe a moral duty towards Jessica, notwithstanding her attitude and behaviour over the years.

….

“… I have determined that the sum of $3.225 million would constitute adequate provision for Jessica’s proper maintenance and support.”

Observations

Three thoughts occur to me.

First, like so many other TFM judgments, Joss contains some judicial platitudes about freedom of testation being “an important human right” but then illustrates that the limitations to that right can be very severe indeed.

Second, religious types might perceive in Joss an echo of the The Prodigal Son. They are wrong.

In the parable, the younger son received a large, early share of the family fortune and squandered it. He then saw the error of his ways and returned to the family fold to express regret and seek forgiveness. In Joss the younger sibling bypassed the family and went to court where expressing indignation rather than regret. And rather asking for forgiveness Jessica sought, among other things, the price of the hypothetical “impeccable” 2 or 3-bedroom house in Malvern or Armadale to which she aspired.

The only common thread between Joss v Joss and the Prodigal Son is that in both stories the older brothers must have come away dumbfounded. (The brothers might also have found themselves questioning the scriptural injunction: “The meek shall inherit the earth”.)

One final cheerful thought though. This type of case often prompts people to ask lawyers how they can be sure that a will won’t be contested after a testator dies. There is only one certain answer if you are a testator:  make sure you spend every last cent you have before you turn up your toes. 

Commercial leasing – rent relief and good faith in a time of Covid-19

Not the Covid-19 Omnibus (Emergency Measures) Act 2020

Victoria’s Covid-19 emergency measures to assist commercial tenants now have formal legal force with the proclamation of the Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020.

Some of the new temporary reforms are drastic. For example, paying rent will effectively become optional in the short term for many commercial tenants. And landlords who even attempt to evict such tenants for non-payment will be guilty of an offence.

The new pro-tenant measures will apply to a vast range of retail and non-retail commercial leases for the six months between 29 March 2020 and 29 September 2020.

The changes are effected mainly by the deeming of new terms into commercial leases and licences, but a crucial detail easily overlooked is that the entire scheme is underpinned by the Commonwealth’s JobKeeper scheme. A commercial tenant who is not a qualified participant in the JobKeeper scheme will be effectively excluded from the protections offered by the new rules.

 

The wide focus

First, a quick refresher and backgrounding for recently arrived Martians and/or anyone too overwhelmed by recent events to have maintained focus.

Retail leases (a very broad concept that commonly includes the leases of shops, offices, serviced apartments and the premises of many other small and medium businesses) are governed by Victoria’s Retail Leases Act 2003. (Although note that the “retail” character of any commercial lease is suddenly less important as the new regime temporarily extends parts of the Retail Leases Act to non-retail commercial leases as well.)

Since March 2020, the snowballing Covid-19 crisis has caused Australia’s federal and state governments to order the partial or complete temporary closure of many businesses nationwide. (In Victoria this has been done mainly by orders under the  Public Health and Wellbeing Act 2008.)

The Federal Government has sought to mitigate the widespread financial disruption resulting from these closures with measures including the JobKeeper scheme. The JobKeeper scheme is expected to subsidize the earnings of millions of private sector employees (and some small business principals) for at least six months until September 2020.  But it is primarily concerned with maintaining employment relationships. It offers no direct help to landlords or tenants suffering financial distress as a consequence of the Covid-19 crisis.

On 3 April 2020 the National Cabinet announced a Mandatory Code of Conduct for Small and Business Enterprises to impose  “a good faith set of leasing principles to commercial tenancies” affected by Covid-19 shutdowns and downturns.

As commercial tenancies have never been considered within the Commonwealth’s constitutional powers and the National Cabinet has the same constitutional status as unicorns under the Australian Constitution (namely none),  the Code of Conduct’s claim as of early April to be mandatory was very optimistic in the absence of supporting state statutes and regulations.

The states have accordingly in recent weeks been legislating to give the National Cabinet’s various pronouncements practical legal effect in state-governed areas such as leasing (and much else besides). Victoria’s legislation for this purpose is the evocatively-named Covid-19 Omnibus (Emergency Measures) Act 2020 (“Omnibus Act”) which commenced operation on last Anzac Day , 25 April 2020.

The Omnibus Act is a thumping 299 pages but commercial landlords and tenants need concern themselves with only a slim bite of it. That portion, Part 2.2, sets out parameters for the supporting regulations but, absent those regulations, it has no real practical utility.

However, we now have those regulations. They were promulgated last Friday, 1 May 2020 as the Covid-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (“Omnibus Regs”) but have effect from 29 March 2020 (note the retrospectivity) until 29 September 2020 when they expire (see regs 3 and 25). The regulations aim to give legal force in Victoria to the National Cabinet’s Mandatory Code.

 

The highlights

The first thing to note about the new regime is that a given tenant’s eligibility for and participation in the JobKeeper scheme is a threshold test.

Only tenants with an “eligible lease” will benefit from the new scheme and the chief criteria for any lease’s eligibility is that that the tenant concerned should be a small or medium enterprise and also a qualified participant in the JobKeeper scheme (see Regs 10(2) of the Omnibus Regs).

Tenants under eligible leases who withhold all or part of their rent will in the short term be deemed not to have breached their leases provided they request rent relief from their landlord in writing,  together with prescribed information including showing their eligibility for the JobKeeper scheme (regs 9 and 10).

A landlord receiving such a request from a tenant is then required to offer rent relief to the tenant within 14 days. The Mandatory Code was understood by many to require that landlords  give rent relief in direct proportion to  their tenants’ drop in revenue but this view must be mistaken as no such requirement appears in the Omnibus Act or the Omnibus Regulations. The Act and the Regulations are the enforceable legal instruments (not the Mandatory Code) and neither of them specify any precise amount or formula for calculating rent relief. Whatever the relief arrived at in a given case, the Mandatory Code, the Omnibus Act or the Omnibus Regulations all require the relief must be in the form of a waiver of rent as to half of that relief and deferral of rent as to the balance of the relief (unless the tenant agrees otherwise).

But back to the obvious key question – what  is the amount of the rent relief to be? The answer is that the amount is to be negotiated “in good faith” (per reg 10(5) of the Omnibus Regs) having regard to factors including the reduction in the tenant’s turnover during the six months from 29 March 2020 to 29 September 2020 (which I will call here the “Covid Window”),  the amount of time (if any) that the tenant was unable to operate its business at the leased premises, and the landlord’s “financial ability to offer rent relief” (Reg 10). (This “financial ability” concept is intriguing. It might even become the subject of a future blog — after I have dusted off the writings of Mother Theresa, Karl Marx, Robin Hood and Alan Bond.)

Collectively, the changes are overwhelmingly pro-tenant. Tenants can waive some or all their new entitlements, but landlords are hamstrung.  A landlord who even attempts to evict a tenant under an eligible lease for non-payment of rent or to call up bank guarantees in response to  non-payment of rent will potentially in each instance be guilty of an offence punishable by a fine of 20 penalty units (being $3304.44) (Reg 9)

Tenants, however, don’t get a perpetual free kick. In the absence of a renegotiated lease (which might include rent deferrals and lease extensions on top of the compulsory rent waiver), the parties are to mediate their dispute through the Small Business Commission (reg 20) and, failing success there, litigate it (reg 22). Reg 22 suggests that VCAT will retain its current exclusive jurisdiction for retail lease disputes and will additionally acquire non-exclusive jurisdiction for non-retail commercial lease disputes. VCAT’s “no costs” presumption is likely to apply to both retail and non-retail lease disputes (see s. 92 of the Retail Leases Act 2003 and s. 109(1) of the Victorian Civil and Administrative Tribunal Act.)

None of this is likely to be good news for landlords.

Commercial tenants large and small are struggling. Cash flows across the economy are faltering. Commercial vacancies are climbing.  Reliable replacement commercial tenants are likely to become very rare birds.  And, to top it all off, the Business and Property List of VCAT (which will hear this type of dispute) is functionally closed for the foreseeable future. When VCAT does eventually reopen, it will inevitably be gummed up by the backlog of cases that have gone unheard during its closure. And that is even before the coming avalanche of Covid-19 rental disputes hits the Tribunal.

This looming traffic jam at VCAT must cast a shadow over rent relief negotiations between tenants and landlords.

The Mandatory Code and the Omnibus Regulations both require landlords and tenants to negotiate their revised arrangements in good faith. As ever in these things, our lawmakers’ attempt to compel good faith seems oxymoronic. Either good faith exists in a given relationship and the formal requirement for it is redundant or bad faith exists and nothing in the Code or the Omnibus Regulations will cure that problem.

A cynical tenant might cut its cloth accordingly. The tenant and landlord who cannot voluntarily agree to a revised rental arrangement will join a long and growing queue to have their squabble determined in VCAT and (assuming the tenant’s compliance with reg 10) the tenant is most unlikely to be evicted at any time before the hearing for its non-payment of Covid Window rent. 

Smart (or desperate) landlords caught in this bind might well prefer the short-term certainty of agreeing to a steeply discounted rental income to the uncertainty of waiting a long time to argue their case in VCAT.

Finally, the disclaimer. The Covid-19 commercial rent regime is new and untested. It is likely to be tweaked in the coming months. My thoughts and summaries above are both general and incomplete. If you are a tenant or a landlord you should not rely upon this blog as a substitute for legal advice tailored to your particular circumstances.

 

 

 

 

Is Covid-19 a frustrating event?

mona lisa with face mask

Photo by cottonbro on Pexels.com

Is Covid-19 a frustrating event? To almost anyone but a contract lawyer that is a stupid question deserving a terse and emphatic response.

But any decent contract lawyer’s answer is unlikely to be short or sweeping.

In contract law, ‘frustration’ is the discharge of a contract as a consequence of some supervening and unanticipated event rendering some or all of the agreement’s obligations incapable of performance. The reported ‘frustration’ cases involve a litany of  catastrophic surprises ranging from the appendicitis-induced postponement of King Edward VII’s coronation in 1903[1], through various wars[2] to (most familiar to Australian lawyers) the legal consequences of a contractor being injuncted from working 24/7 to build Sydney’s Eastern Suburbs Railway line[3] in circumstances where the construction contract was effectively predicated on ‘round the clock’ work.

The Covid-19 coronavirus is plainly a supervening and unanticipated event. It has already caused history’s first postponement of the Olympic games. It has closed all of your local gyms and eateries. It has largely shut down Victoria’s court system.  And just when we lawyers thought things could not get worse, it is even causing surprise outbreaks of law and order. But none of these extraordinary developments alone answers the question of whether the current crisis is a frustrating event for the purposes of any particular contract.

Here is a quick refresher on the frustration of contracts:

  • When looking at whether a contract has been frustrated, don’t be too distracted by the macro picture. Focus on the specific contract in question. Has the contract become largely or completely incapable of performance because of the Covid-19 crisis? (Obvious casualties would be, say, the catering contract for a large wedding party that would now be contrary to the Public Health and Wellbeing Act 2008, or the contract for the screening of TV advertisements during the telecast of the now-postponed Tokyo Olympics.) Or has the contract’s subject matter simply become less attractive or more onerous to one of the parties? (Examples in this twilight zone might include the marriage celebrant’s booking for that same large wedding — after all, the wedding itself is still permitted even if the attendance of more than 2 guests is prohibited — or the screening of TV commercials (themselves still clearly legal and feasible) promoting, say, holiday packages that are neither legal nor feasible in the current circumstances.)
  • Frustration is a binary concept. Some contracts will be discharged entirely for frustration. Some will be held not to have been frustrated at all and thus will survive the supervening event entirely unscathed. There is no legal middle ground in between which allows contracts to be amended but otherwise upheld on the basis that they were semi-frustrated.
  • Extreme pessimists (and possibly also those negotiating contracts very recently) might have had the foresight to address specifically the consequences of global pandemics in their agreements. They will have no need for the doctrine of frustration and will instead be governed by the force majeure clauses (aka ‘Act of God’ clauses) to which they have agreed. As frustration applies only where the supervening event is not anticipated by the contracting parties, frustration and force majeure clauses are best thought of as alternatives to each other.
  • Frustration ends a contract as a consequence of the supervening event. By contrast, force majeure clauses are bespoke provisions. They might end the contract but will commonly suspend rather than terminate the contract or reduce rather than eliminate a party’s entitlement to payment.
  • Frustration operates independently of the parties’ acts and intentions. Force majeure clauses are authored by the parties and as such will often require action or communication for invocation.

 

Consequences of frustration

Let’s suppose a given contract is frustrated by Covid-19. What next?

Melbourne’s Formula 1 Grand Prix last month is a high profile example. Armies of large and small contractors and sub-contractors were involved in setting up for the race and its various satellite events. The race was then cancelled at the last minute because of Covid-19 concerns. Myriad contracts must then have become incapable of performance. In each instance, the question arises of who should carry the cost of the food/ entertainment/equipment that was arranged and (mainly) delivered but ultimately wasted as a consequence of Covid-19?

There is no quick and confident across-the-board answer.

And don’t expect much help from the the frustrated contracts provisions of Part 3.2 of the Australian Consumer Law and Fair Trading Act 2012. In very crude summary, it provides that money paid or payable under a frustrated contract ceases to be payable and, if paid, is recoverable by the recipient EXCEPT where a court or VCAT considers it just to order otherwise.

Note that pandemic-sized exception.

Put another way, the answer as to who is to carry the losses of a frustrated contract  is ‘black’ except when a court or VCAT considers that it should be ‘white’ or some shade of grey (or perhaps some chequered-flag pattern for Grand Prix-related events).

This legislation gets more curious still. Its open invitation to litigation appears to have been accepted in Victoria on – wait for it – only a single occasion. That case was Foley v Afonso Building Solutions [2014] VCAT 1640.

In Foley v Afonso a landowner paid a builder a $10,000 deposit on a domestic building contract. It then transpired that the building permit necessary for the project was unobtainable. The owner wanted her deposit back. The builder refused as it was not his fault that the building permit didn’t issue. So the parties went to VCAT.

Senior Member Walker concluded that the contract had been frustrated by the impossibility of getting the essential building permit. He ordered that the owner was entitled to have most (but not all) of her deposit refunded. The builder was permitted to retain the $1800 he had spent on preliminary work (such as drawings and soil tests) but not the $8000 commission he paid the agent who had secured the contract.

The decision is short. It doesn’t mention any authorities or the word ‘restitution’ but the restitutionary flavour is unmistakable.

Presumably Covid-19 will soon ensure that Foley v Afonso is superseded by many more authorities on the consequences of frustrated contracts in Victoria.

 

Conclusion 1

Covid-19’s frustrations are suffocatingly obvious to most of us. But that doesn’t mean contracts affected by the virus will necessarily be themselves frustrated.

And whatever the answer on first principles to your particular frustration query, beware of the continuing cascade of government announcements and promised regulatory changes that might take your client’s situation beyond a ‘first principles’ analysis anyway.

With this in mind, follow resources such as –

Conclusion 2

A final thought over and above frustration.

In these extraordinary times, remember that your clients’ best Covid-19 solutions might not be in the legal textbooks at all.

The unexpected and supervening event of Covid-19 might, for example, trigger the business interruption insurance that your client has forgotten it holds and make the entire frustration discussion unnecessary. Check that insurance.

And while the C-19 maelstrom continues, remember also that the banking industry (see for example this Commonwealth Bank Covid-19 support page) and the laws of insolvency have both been temporarily transformed in recent weeks. (Your clients might have more time and options available than they appreciate.)

Stay safe!

[1] Compare Krell v Henry [1903] 2 KB 740 and Hearne Bay Steam Boat Co v Hutton [1903] 2 KB 683. Both cases involved sightseers disappointed by the coronation’s postponement. In the former case the contract was held to have been frustrated by the postponement; in the latter the contract was held not to have been.

[2] See for example Fibrosia Spolka Akcjyna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 where a pre-war contract that required an English company to deliver machinery into Poland was rendered illegal and frustrated by the outbreak of World War 2.

[3] Codelfa Construction Pty Ltd v State Railway Authority of NSW (1982) 149 CLR 337.

Mann up! High Court holds innocent party to a repudiated contract and bins alternative quantum meruit claims

For at least 115 years it has been the law in Australia that where a contract is repudiated the innocent party can recover damages either in accordance with that contract or upon a quantum meruit. Predictably, such claimants have always asked for whichever was the higher of the two available measures and this has sometimes involved shrugging off the contract price as irrelevant.

That all changed yesterday when the High Court delivered its decision in Peter Mann v Paterson Constructions [2019] HCA 32.

The seven judges delivered three judgments spanning 99 pages. In a nutshell, they  agreed that the contractual measure of damages should be the ceiling on damages and that the former long-standing position is, in the words of Keifel CJ, Bell and Keane JJ, based on “fallacious reasoning … which may give rise to serious mischief”.

In Peter Mann v Paterson Constructions, property owners contracted with a builder for the construction of two townhouses in Blackburn, Victoria. The contract price for the development was $971,000. The work was largely completed and $946,000 of the contract price had been paid before the relationship ended in acrimony with each party accusing the other of repudiation and purporting to accept such repudiation.

Their dispute then went to VCAT where Senior Member Walker held that the owners had wrongfully repudiated the contract, the builder had accepted that repudiation, the contract was at an end, and that the builder as the innocent party was entitled to recover damages calculated by reference to the market value of the building work and labour delivered to the owners. He assessed that value at $1.6 m.

After allowance for the $946,000 already paid, he held that the builder was entitled to damages from the owners of $660,000. Hence the bottom line financially at VCAT was that the owners were liable to  the builder for about 165 per cent of the original contract price because of their repudiation of that contract.

The owners appealed unsuccessfully to a single judge of the Supreme Court and then to the Court of Appeal before winning seven judges to nil in the High Court.

Following  yesterday’s decision, where a building contract in Australia (or other contract for work and labour done) is terminated for repudiation or breach, damages for breach of that contract will generally be the sole remedy.

What now? The High Court has remitted  Mann  back to VCAT for its recomputation of the builder’s damages. More than three years after he first heard the matter, that recalculation might be done by Senior Member Walker as the owners’ submission to the High Court that he should not hear the remitter was rejected.

The wash-up? Three thoughts occur to me.

First, the High Court’s decision will be big news for building and construction lawyers,  as it overturns a century of established law. But it won’t be a big surprise to those who remember Sopov v Kane [2009] VSCA 141 in which Victoria’s Court of Appeal unanimously expressed sympathy for the owners’ predicament in a similar case but nevertheless found for the builder on the basis that treating repudiated contracts as a ceiling on quantum meruit claims was “a step which the High Court alone can take”.

Second, until yesterday builders and others stuck in unprofitable contracts had a powerful financial incentive to terminate for breach by their counterparty in the expectation that they would be able to reprice their work retrospectively with a quantum meruit claim in the subsequent litigation. That financial escape route has just been soundly shut by the High Court.

Third, the decision is also bad news for quantity surveyors. Demand for their expert evidence as to the ‘as built’ value of construction works is likely to take a hit.

High Court refuses to order escaped legal professional privilege cat back into the bag

Legal professional privilege is a legal immunity but it is not an independent cause of action. So ruled the full bench of the High Court last week in a joint judgment in Glencore International AG v Commissioner of Taxation [2019] HCA 26.

Does the distinction matter?

It was probably crucial for the disappointed plaintiff, vast Swiss-British miner Glencore in its continuing tussle with the Australian Taxation Office.

As you might recall from global media coverage at the time, in 2017 millions of documents were leaked from the Caribbean-based law firm Appleby in an episode that became known as ‘the Paradise Papers.’ Appleby specialises in tax minimisation involving tax havens. Its recent clients include Glencore.

Some of Appleby’s Glencore advice and related documentation leaked its way to the ATO which took a very deep interest in it.

This ATO attention was sufficiently embarrassing for Glencore  to invoke the High Court’s original jurisdiction and seek an injunction against the ATO retaining, relying upon or referring to any of the stolen Appleby documents relating to Glencore.

The High Court noted that there was no issue that the documents stolen from Glencore’s lawyers were  subject to legal professional privilege. But the seven judges unanimously found that this meant only that the documents were exempt from production by court process (eg discovery or subpoena) – it did not necessarily mean that the ATO could be injuncted from using documents which had come into its possession independently of such court processes.

The Court stated [at paras 12 – 13]

Fundamentally [Glencore’s application] rests upon an incorrect premise, namely that legal professional privilege is a legal right which is capable of being enforced, which is to say that it may found a cause of action. The privilege is only an immunity from the exercise of powers which would otherwise compel the disclosure of privileged communications…

It is not sufficient to warrant a new remedy to say that the public interest which supports the privilege is furthered because communications between client and lawyer will be perceived to be even more secure. The development of the law can only proceed from settled principles and be conformable with them. The plaintiffs’ case seeks to do more than that. It seeks to transform the nature of the privilege from an immunity into an ill-defined cause of action which may be brought against anyone with respect to documents which may be in the public domain.

Apart from there not being a cause of action, there was the further difficulty that the cat was already well and truly out of the bag in any event. Para 33:

The relief sought by the plaintiffs points to further difficulties….[including] the fact that the information the subject of the claimed privilege is now in the public domain. In the latter respect the circumstances of this case identify a particular problem were an injunction to be granted. It is that the defendants would be required to assess Australian entities within the Glencore group to income tax on a basis which may be known to bear no real relationship to the true facts.

Ouch. That sounds like there might be a nasty revised tax bill in the pipeline to Glencore.

Swiss bank accounts, Australian commercial litigation and the privilege against self-incrimination revisited

Switzerland pic 310817

In happier times the De Lutis brothers built up a Melbourne property empire worth (according to this Age story) $500 million. But now the pair has fallen out.

Younger brother Paul wants his share of the financial pie and is suing older brother Colin in the Victorian Supreme Court. It seems that the pie includes $18 million which has sloshed through various bank accounts in Switzerland, Singapore, the British Virgin Islands and Hong Kong since the 1980’s.

As plaintiff, Paul wants to detail these funds and transactions to the judge now trying the matter but is apparently concerned that his evidence might attract some unwelcome scrutiny from the Australian Taxation Office.

What to do?

Section 128 of the Evidence Act permits a court to issue a certificate which will prevent a witness’s evidence being directly or indirectly used against that witness in a subsequent criminal prosecution. The section is predicated (see s. 128(1)) upon the witness objecting to giving evidence on the ground that such evidence might tend to prove that the witness has herself committed an offence or be liable to a civil penalty.

Paul has already received one s. 128 certificate about an unrelated matter in this litigation. Last week he sought another concerning the itinerant $18 mil.

This week, the trial judge Justice James Elliott refused that application.

In a pithy ruling (De Lutis v De Lutis & Ors [2017] VSC 505) Elliott J observed that in civil litigation a plaintiff is free to prosecute his own case if and how he chooses. As there is no element of legal compulsion in the evidence Paul might choose to give in chief, he can scarcely choose to give evidence of a particular matter and simultaneously object to doing so.

Absent a valid objection to the giving of evidence, a witness has no entitlement to a s. 128 certificate. Hence no s. 128 certificate for Paul concerning his proposed evidence in chief.

Elliott J also observed that the cat was arguably out of the bag anyway. The $18 million had already been referred to in evidence earlier in the proceeding and “… where so much of the subject matter had [already] been disclosed voluntarily, it is difficult to see how this further [proposed potentially self-incriminating] evidence would materially alter Paul’s position.”

The lessons from this? Several occur to me:

  1. Prospective civil litigants in commercial litigation should weigh up the potential longer term ramifications of their evidence. In particular, will they be embarrassed (or worse) if the transcript from a civil trial finds its way into the tax man’s hands? If so, steering clear of commercial litigation might be a prudent way to minimise the risk of a later criminal prosecution.
  2. The risks of having an application for a s.128 certificate refused apply to both prospective plaintiffs and defendants but are probably more pronounced for plaintiffs who are almost by definition volunteering from the very outset to give their evidence. Similarly, different considerations are likely to apply to evidence given by a witness under cross-examination rather than during evidence in chief.
  3. If your client might need a s. 128 certificate, seek it early. Don’t run the risk of having the judge rule that the self-incrimination horse has already bolted. (Also, even an early failed128 certificate application might have forensic advantages given the possibility of such failed objections being retrospectively upheld – see 128(6) of the Evidence Act.)
  4. Finally, any family that has had $18 million lying idle in its various Swiss and Caribbean bank accounts for decades is clearly long overdue for a holiday together skiing in Zermatt or sailing off Barbados. Inter alia, both destinations are likely to be much more entertaining and much less expensive than a protracted intra-family dispute in the Supreme Court.

When winners are not grinners – who gets paid first when the winning litigant goes bust?

Commercial litigation is often ultimately uncommercial. And when things turn really sour solicitors will often have a personal stake in the question of who is to miss out financially.

This issue arose in an insolvency context last week in a Supreme Court tussle between mega firm DLA Piper and the liquidators of their former client Windemac Pte Ltd.

Back in 2013 Windemac won a Supreme Court judgment for $312,000 plus interest and costs. It was perhaps a Pyrrhic victory as DLA’s bills to Windemac totalled almost $360,000. Windemac went bust two years later still owing DLA Piper more than $100,000.

After Windemac went into liquidation there still remained a costs order for almost $98,000 in Windemac’s favour to be enforced against the defendants. Was that money to go to Windemac’s liquidators or to the short-paid solicitors?

Associate Justice Derham held that the solicitors were entitled to an equitable lien over the proceeds of the costs order on established ‘fruits of the action’ principles and that the solicitors’ rights had priority over the claims of Windemac’s other creditors in the insolvency.

The decision contains a useful extract on solicitor’s liens for costs extracted from Elliot J’s decision in Oakley Thompson & Co v Maisano (No 2) [2015] VSC 210 at 77. Here (with citations omitted) is Elliot J’s summary:

(1)     At common law, a solicitor has a general possessory lien for all professional costs due by her or his client.  This entitles the solicitor to keep in her or his possession all property of the client which comes into the solicitor’s possession during the course of her or his professional employment until the solicitor’s costs have been paid.

(2)     A solicitor has no lien for costs over any property which has not come into her or his possession.

(3)    If a client obtains a judgment for the payment of money (including a judgment for costs),  the solicitor acquires a right to have her or his costs paid out of the money payable, such right being an equitable right to be paid.  This right is not dependent upon an order having been made to recognise the right, or upon a taxation having occurred.

(4)    If the solicitor gives notice of the right to the person who is liable to pay the money, only the solicitor, and not the client, can give a good discharge to that person for an amount of the money equivalent to the solicitor’s costs.

(5)    If the person liable to pay has notice of the solicitor’s right, but refuses to pay the solicitor, the solicitor may obtain a “rule of court” directing that the costs be paid to the solicitor and not to the client.  (In this context, a rule of court is a reference to an order or a direction of the court.)

(6)    If the client and a judgment debtor make a collusive arrangement in order to defeat the solicitor’s right, the court will enforce that right against the judgment debtor notwithstanding the arrangement and notwithstanding that no notice of the solicitor’s claim has been given to the judgment debtor prior to the arrangement.

Associate Justice Derham’s decision is DLA Piper Australia v Official Receiver of Singapore (as liquidators of Windemac Pte Ltd) [2017] VSC 216.

The lesson from this? Solicitors’ liens are good and can trump a liquidator. But solicitors getting their money into trust up-front on account of fees is even better. After all, the solicitors here might have chalked up a win but they still took a haircut on the fees which had been outstanding to them for over four years.