Less than a year later, a decision in the Victorian Supreme Court has challenged the concept of a vendor’s ‘absolute discretion’ when trying to terminate an off-the-plan contract on the basis that authority requirements for a plan of subdivision were ‘too onerous to perform’.

In Eastbound Estate Pty Ltd v DC Consolidated Investments Pty Ltd VSC 2024, DC Consolidated Investments (DCI) sought to terminate an off-the-plan contract on the basis that authority requirements relating to a plan of subdivision were too onerous to perform, and lost.

The court held that the inclusion of the expression ‘absolute discretion’ in the contract did not allow DCI to exercise the power at the whim of DCI irrespective of the kind of condition imposed by an authority.

Accordingly, ‘absolute discretion’ is not as absolute as it might seem.

The facts

The parties entered into an option in May 2021 for a parcel of industrial land in Bayswater North, for an agreed sale price of $55,475,000 plus GST if the option was exercised. In August 2021 Eastbound Estate (Eastbound), as purchaser, on-sold the property to a third party for $68,975,000, and then in December 2021 Eastbound exercised the option and entered into the contract of sale with DCI.

The contract between Eastbound, as purchaser, and DCI, as vendor, was an off the plan contract of sale. It contained an obligation on DCI to procure certification of the plan of subdivision by Council, and endorsement with a statement of compliance, by a certain date.

Eastbound was required to undertake, at its cost, all works specified in approvals relating to the plan of subdivision as soon as practicable.

The contract contained a special condition (special condition 10.7) as follows:

10.7 Without limiting the obligation in special condition 10.2, if the responsible Authority:

(a) refuses to grant an Approval other than as a result of an act or omission of theVendor; or
(b) imposes a Requirement that in the opinion of the Vendor (in its absolute discretion) is too onerous for the Vendor to perform;
the Vendor may terminate this Contract by giving written notice to the Purchaser

In April 2022, Council issued a planning permit for the plan of subdivision, and later that month DCI purported to terminate the contract on the basis that certain conditions in the planning permit were too onerous for it to perform. Eastbound rejected that termination.

The court ruling

DCI argued that whether Council’s requirements were too onerous to perform was a matter for it, in its unfettered discretion, to determine. Eastbound argued that DCI needed to demonstrate that it had formed an opinion on whether Council’s requirements were too onerous to perform before terminating, and that such opinion was reasonably formed on the evidence.

The court rejected DCI’s claim to terminate the contract, and held that Eastbound was entitled to complete its purchase by granting Eastbound specific performance of the contract.

In reaching this conclusion, the court held that:

1. The concept of absolute discretion did not exclude the operation of ordinary contract construction principles. Special condition 10.7 had to be interpreted in the context of the whole of the contract and the commercial purpose. The court found that the commercial purpose of the contract was to facilitate the sale of the property, not to facilitate its potential sale only in certain scenarios. Eastbound’s obligations to carry out the works to facilitate the subdivision were relevant here.

2. The inclusion of any statutory requirement on a party is inherently onerous and may well have financial consequences. Having regard to the drafting of special condition 10.7, the question wasn’t whether Council’s requirements were onerous, but whether they were ‘too onerous’ for DCI ‘to perform’.

3. In deciding whether Council’s requirements were too onerous for DCI to perform, the decision did indeed lay with DCI. However, DCI’s ability to exercise its discretion required it form an opinion and to justify that opinion.

4. Upon interrogating the evidence, the court found that DCI had given conflicting reasons for reaching the opinion that Council’s requirements were too onerous for it to perform. It did not help that DCI did not call its sole director and shareholder to give evidence.

Key points to consider

Parties should tread with caution when exercising termination provisions in legal agreements on the basis of the decision to terminate being at the absolute discretion of the party exercising that right. In particular:

• Qualifying language imposed on a party within a termination right – such as ‘too onerous’ or ‘reasonable’ – requires careful analysis.

• It may well be that the party relying on the termination right needs to be able to demonstrate that it had justifiable grounds for exercising its right to terminate. The words ‘absolute discretion’ do not necessarily allow the party exercising the right an unfettered discretion to do so.

• All of the terms of the agreement need to be assessed, as well as the overall commercial purpose of the agreement.

If you have any questions on termination rights or this case, feel free to contact a member of the Maddocks Development team.