This case is a text-book demonstration of a court construing a commercial contract so as to avoid it making commercial nonsense – a nonsense that the appellant spent more than 12 years chasing through the ACT courts.

Case study

The respondent (Cotrell) was the owner of a shopping centre in the ACT, called Kaleen Plaza. The appellant (Supabarn) leased part of Kaleen Plaza from Cotrell to operate a supermarket, and commenced proceedings against Cotrell in the ACT Magistrates Court over an alleged breach of the lease agreement.

The proceedings were transferred to the ACT Supreme Court in 2009 but the matter did not come on for a final hearing until September 2013 (the Court of Appeal described that delay as a ‘possible lack of fortune’), followed by (what the Court of Appeal described as a ‘lamentable’) delay of almost six years until the Supreme Court delivered its judgment awarding Supabarn $20.00 in damages. Was it worth the wait?

The Lease Agreement

Clause 10.7 of the lease stated (emphasis added):

The Landlord must conduct, manage and operate the Centre as a high quality retail shopping centre and in an efficient manner at all times.

‘Centre’ was defined as meaning, essentially, Kaleen Plaza.

The claim

Supabarn submitted that Cotrell had breached the lease agreement in a number of ways but only one claim was the subject of the appeal (considered in this case study). Incidentally, the $20.00 in damages was awarded for the breach of an obligation to provide cleaning services.

Relevantly, Supabarn claimed that Cotrell had not operated the Kaleen Plaza as a ‘high quality’ retail shopping centre and sought damages approaching $8 million for loss of profits.

In particular, Supabarn argued that the lease obliged Cotrell to undertake substantial refurbishment of Kaleen Plaza and to upgrade its tenancy mix, which Supabarn claimed would have made its supermarket more competitive with the others in new and improved shopping centers in surrounding areas (including in particular Jamison Plaza) and significantly more profitable over the last few years than it actually was. Those Canberrans who frequent Jamison Plaza never knew they had it so good!

The judgment

The trial judge conducted a viewing of Kaleen Plaza (which, apparently, she did not find particularly helpful) and interviewed several witnesses there at the time, who seemed to have particular gripes with the plaza’s original 1988 colour palette of cream walls with baby blue trim. There is no accounting for taste.

Ultimately, the court found, both at first instance and on appeal, that the construction of clause 10.7 urged by Supabarn was not available; the lease did not require Cotrell to turn a shopping center that had never been a ‘high quality’ one into such a thing. Rather, Cotrell was obliged to run Kaleen Plaza day-to-day, including maintenance and repairs, in a manner appropriate to a high quality retail shopping centre.

In reaching this decision, the Court of Appeal reasoned that Supabarn’s construction would:

• impose a significant cost burden on Cotrell that was not reflected in the amount of rent payable by Supabarn nor was the term of the lease lengthy enough to recoup that expenditure
• put Cotrell in breach from the first day of the lease or, at least, the timeframe for completing a refurbishment was not certain nor was the scope of work required – being commercial entities, the parties would have documented such terms in detail (if agreed); and
• would be an ‘illogical and quantum leap from the wording of the clause’, noting the word ‘refurbishment’ did not appear anywhere in the lease nor was the phrase ‘high quality retail shopping center’ either defined in the lease or a recognised industry term.

Key takeaways

The Court of Appeal’s judgment provided a neat summary of the relevant principles to be applied in interpreting a commercial contract, from the High Court’s decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37:

• the rights and liabilities of the parties are determined objectively, by reference to the text of the contract, its context and purpose;
• the meaning of terms is determined by what a reasonable businessperson would have understood those terms to mean. That will consider 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;
• the process of construction is ordinarily possible by reference to the contract alone. If an expression is unambiguous or susceptible to only one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning;
• recourse to surrounding circumstances may be necessary to identify the commercial purpose or objects of the contract when that task is facilitated by an understanding of the genesis of the transaction, the background or the market in which the parties are operating;
• the recourse to surrounding circumstances is objective. What may be referred to are things that are known to the parties and that assist in identifying the purpose or object of the transaction. On the other hand, evidence of the parties' statements and actions reflecting their actual intentions and expectations is inadmissible; and
• a court is entitled to assume that the parties intended to produce a commercial result. In other words, a commercial contract should be construed so as to avoid it making commercial nonsense or working commercial inconvenience.

You should always take the opportunity to ensure your contracts are drafted in clear and express terms that accurately and comprehensively communicate the intended meaning of each provision. This should be done not only in pre-contractual negotiations but whenever the term of a contract is varied or extended, or when there is any other cause to review the contract (such as frequent or significant disagreements between the parties over its intended meaning).