IN THE SUPREME COURT OF VICTORIA Not Restricted AT ...media.heraldsun.com.au/files/North_East_Solution_Pty_Ltd_v_Masters... · IN THE SUPREME COURT OF VICTORIA Not Restricted AT MELBOURNE

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE COMMERCIAL COURT LIST C

S CI 2012 02700 NORTH EAST SOLUTION PTY LTD (ACN 129 466 851) Plaintiff v MASTERS HOME IMPROVEMENT AUSTRALIA PTY LTD (FORMERLY SHELLBELT PTY LTD) (ABN 21 066 891 307)

First Defendant and

WOOLWORTHS LIMITED (ABN 88 000 014 675)

Second Defendant

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JUDGE: CROFT J

WHERE HELD: Melbourne

DATE OF HEARING: 18–21 May, 25–28 May, 1–4 June, 17–18 August and 16–17 September 2015

DATE OF JUDGMENT: 28 January 2016

CASE MAY BE CITED AS: North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd

MEDIUM NEUTRAL CITATION: [2016] VSC 1

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CONTRACT – Good faith – Enforceability of agreement to negotiate in good faith – Breach of obligation to act reasonably and in good faith – Relationship between obligation to act “reasonably” and obligation to act “in good faith” – Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 – Construction of commercial contracts – Terms implied in order to give business efficacy to agreement – Incorporation of terms of earlier agreement into subsequent agreement – Different named parties in subsequent agreement. DAMAGES – Quantification of loss and damage – Lost opportunity to develop and lease land – Date at which damages are assessed – Capitalisation of Income method of valuation not the most appropriate method of estimating loss and damage – Discounted Cash Flow method of valuation – Sellars discount – Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.

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APPEARANCES:

Counsel Solicitors

For the Plaintiff P.J. Bick QC with B. Gibson

Tisher Liner FC Law

For the Defendants P.D. Crutchfield QC with N. McAteer

Minter Ellison

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TABLE OF CONTENTS

Introduction ......................................................................................................................................... 1

Evidence ............................................................................................................................................... 3

Approach to the evidence ................................................................................................................. 5

Agreements between the parties ..................................................................................................... 7

Contractual framework ................................................................................................................... 16

Letter of Offer ........................................................................................................ 16

Agreement for Lease ............................................................................................ 23

Nature and effect of contractual obligations .............................................................................. 35

Factual issues..................................................................................................................................... 58

Letter of Offer ..................................................................................................................... 58

Costing of generic design briefs ...................................................................................... 59

Agreement for Lease ......................................................................................................... 61

Events preceding negotiation of Landlord’s Works Costs .......................................... 61

Discussions regarding Masters’ contribution to Landlord’s Works Costs ............... 67

The 22 April 2010 meeting .............................................................................................. 106

Events after 22 April 2010 ............................................................................................... 119

Plaintiff’s allegations of breach................................................................................................... 121

Woolworths did not act reasonably to identify and resolve any differences ......... 127

Role of Vaughan Constructions ..................................................................................... 136

Woolworths did not act in good faith to identify and resolve any differences ...... 146

Woolworths’ unwillingness to engage with NES .......................................... 146

The effect of Woolworths’ undisclosed budget ............................................. 148

Other matters affecting Woolworths’ performance of its obligations ..................... 151

Pursuit of the Hume & Iser site ........................................................................ 151

Other considerations .......................................................................................... 159

Greater Bendigo City Council opposition ...................................................... 159

Financial position of NES .................................................................................. 161

Agreement for Lease terminated by Woolworths for reasons not contemplated by its terms ................................................................................................................. 164

Conclusion in relation to liability ............................................................................................... 168

Loss and damage ............................................................................................................................ 173

Applicable principles ...................................................................................................... 173

What was the opportunity lost by NES? ...................................................................... 180

Would NES have acted on the opportunity had it been offered? ............................ 183

Did the opportunity have some (not negligible) value? ............................................ 185

Would agreement have been reached in relation to the Landlord’s Works Costs?186

Would Bendigo Bank have funded the development? .............................................. 188

Would flood inundation issues have prevented the development? ........................ 200

Would the requisite planning approvals have been obtained? ................................ 208

Would NES have realised the opportunity to develop and lease the Bendigo site?219

Quantification of loss .................................................................................................................... 221

If NES has lost a valuable opportunity, what was that opportunity worth? .......... 221

Valuing the lost opportunity .......................................................................................... 222

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Appropriate methodology for assessing value of lost opportunity ......................... 222

Cash flow methodology.................................................................................................. 224

Comparison of cash flows ................................................................................. 224

Valuing the cash flows that would have been achieved ............................................ 225

The Discounted Cash Flow method .............................................................................. 226

The Capitalisation of Income method .......................................................................... 229

The validity of the Discounted Cash Flow method for valuing the cash flows ..... 231

The application of the Discounted Cash Flow method .............................................. 233

Valuing the cash flows together as at the date of completion .................................. 234

Issues with valuing cash flows as at the date of completion .................................... 235

The evidence of Ms Wright and Mr Jackson on valuation ........................................ 239

The appropriate yield ...................................................................................................... 244

What date should be used when determining the applicable yield? ....................... 244

The yield selected by Mr Jackson .................................................................................. 248

Conclusion: value of the lost opportunity ................................................................................. 252

Discount to reflect risks ................................................................................................................ 253

Orders ............................................................................................................................................... 255

SC:KS 1 JUDGMENT North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd

HIS HONOUR:

Introduction

1 In broad terms, this case concerns agreements and dealings between the Plaintiff,

North East Solution Pty Ltd (“NES”), and the Defendants, Masters Home

Improvement Australia Pty Ltd (“Masters”) and Woolworths Limited

(“Woolworths”), with respect to the development of what is described as a Masters

store at Strathdale, a suburb of Bendigo. The actual site of the proposed Masters

store is at 195 McIvor Road, Bendigo, which, for convenience, is referred to as “the

Strathdale site” or “the Bendigo site”. Also, for convenience—unless a distinction

needs to be drawn in a particular context—“Masters and Woolworths” are referred

to as “Woolworths”.1 Also, for the sake of clarity, it should be noted that a reference

to “Oxygen”, an “Oxygen store”, “Project Oxygen” and the like is a reference to

Masters, a Masters store or the Masters stores rollout by Woolworths, respectively.

2 The broader context of the proposals for the development of a Masters store at the

Strathdale site was the development by Woolworths of the Masters store brand to

compete with the Bunnings chain of hardware stores nationally. As is discussed in

further detail in these reasons, the intention was to roll out the Masters stores

nationally very quickly in competition with Bunnings. In a major development of

this kind, one might normally expect detailed design briefs, agreements for lease,

and lease and building contracts. However, in the circumstances affecting the

present case, the time constraints Woolworths saw as imposed on the Masters rollout

meant that arrangements and agreements needed to move far more quickly than

might usually be the case. So, again in broad terms, Woolworths adopted the

approach of agreeing to contribute the difference between the estimated cost of

building a Bunnings store on a particular site and the cost of building a Masters store

on that site. The difference arose—the Masters store development being more

expensive—as a result of the view taken that there would be a marked advantage in

enhancing the Masters store premises by, for example, providing concrete, rather

than metal side walls and some other features. It was thought that these

1 References in the evidence to “WOW” should be read as referring to “Woolworths”.


enhancements would be more attractive to potential customers, particularly female

customers. A reader of these reasons might, in light of extensive coverage recently

in the financial and other business press, have some thoughts about this strategy. I

mention this coverage in this context to emphasise whether or not such a business

strategy is or is likely to be successful is not a matter relevant to these proceedings

and is not a matter with which the Court has had or should have regard. The

assessment of the position of the parties in these proceedings is based entirely on the

evidence before the Court, written and oral; evidence which does not include these

recent press reports.

3 The case concerns the nature and extent of contractual obligations between the

parties with respect to the development of and leasing of the Strathdale site for the

Masters store. More particularly, but nevertheless in general terms, a critical issue in

this context is the nature and extent of the obligations of the parties to act reasonably

and in good faith in pursuing their agreement with respect to the development.

4 The agreement between the parties with respect to the Strathdale site development

was the subject of a Letter of Offer which effected a binding agreement between the

parties by 2 June 2009 (“the Letter of Offer”)2 and an agreement for lease which was

executed on 24 February 2010 (“the Agreement for Lease”).3

5 In substance, these agreements provided that NES would develop a Masters Home

Improvement store for Woolworths at the Strathdale site and, once it had been

developed, Masters would lease that store from NES for a period of 12 years with

options for a further five terms of six years each.

6 These agreements were binding on the parties and, relevantly to these proceedings,

could only be terminated if the parties, acting reasonably and in good faith, were

unable to resolve any disagreement that arose in relation to the construction costs,

specifically a Landlord’s Works Costs amount and Masters’ contribution to that

amount. The precise terms of these agreements and the extent of these obligations is

2 Court Book 1039. 3 Court Book 2939.


discussed in detail in the reasons which follow. It is common ground in these

proceedings that in May 2010, Woolworths purported to terminate the agreements

on the basis that the parties could not resolve disagreements in relation to the

Landlord’s Works Costs and the Masters contribution.

7 The gravamen of the NES case is its contention that there was no genuine

disagreement in relation to the calculation of the Landlord’s Works Costs or, if there

was such a disagreement, Woolworths had not acted reasonably or in good faith to

resolve it. NES contends, instead, that Woolworths terminated the agreement for

other reasons. It is said that these reasons included construction costs exceeding an

undisclosed budget (a budget which Woolworths kept to itself), a desire to purchase

an alternative site in Bendigo, perceived opposition from the Greater Bendigo City

Council (“the Council”) and residents, and perceived funding issues affecting NES.

None of these grounds, NES contends, entitled Masters or Woolworths to terminate

the Agreement for Lease according to its terms.

8 Woolworths, on the other hand, contend that this case concerns a contractual

obligation as between two sophisticated commercial parties (apparently treating

Masters and Woolworths as one) to act reasonably and in good faith in attempting to

agree commercial terms to form part of an agreement for lease. The commercial

terms to be agreed were, it is said, the Landlord’s Works Costs, the amount that

Masters must contribute (being the Masters contribution), and the manner in which

such a contribution would be made. Woolworths deny that there was any failure to

comply with its obligations under the agreements, and observe—as a truism—that

the fact that the parties did not reach agreement on these commercial terms is not

evidence of any such failure. Rather, it is contended that for NES to succeed in its

case, it must identify a course of conduct on the part of the Defendants, Masters and

Woolworths, in relevant negotiations, which offends conscience or is otherwise

wholly unreasonable given the relevant circumstances and context.

Evidence

9 A number of individuals gave evidence in these proceedings, including the


following:

(a) Mr Andrew Thomas Biacsi, Director of Contour Consultants Australia Pty

Ltd;

(b) Mr Brendan Edward Blake, Property Developer and sole director of the

Plaintiff;

(c) Mr Richard Charles Douglas Champion, National Property Manager at

Woolworths;

(d) Mr Gerald Peter Davis, Senior Associate at Blackstone Waterhouse Zouki

Lawyers (formerly a Lawyer at Fetter Gdanski);

(e) Mr Michael David Fetter, Principal Lawyer at Tisher Liner FC Law (formerly

a Partner of Fetter Gdanski);

(f) Mr Michael Joseph Graves, Partner of Allens;

(g) Mr Grant Andrew Jackson, CEO of m3property;

(h) Mr Timothy Stuart Macmillan, Group Property Operations Manager—South

at Woolworths;

(i) Mr Ewen Kenneth McDonald, Director of Rider Levett Bucknall;4

(j) Mr Andrew Maxwell McGregor, Business Banking Manager at Bendigo Bank;

(k) Mr Stuart Andrew McGurn, Partner of Environmental Resources

Management Australia Pty Ltd;

(l) Mr Trevor Ernest Stockwell, Senior Partner of MCP Group (Bendigo)

(formerly National Manager for Complex Business, and Regional Credit

Manager at Bendigo Bank);

4 In these reasons, for convenience, the firm Rider Levett Bucknall is referred to as “Rider Hunt”. In the

evidence, it is variously referred to as “Rider Levett Bucknall”, “RLB”, “Riders” and “Rider Hunt”.


(m) Mr Owain Stone, Partner of KordaMentha;5

(n) Mr Grant David Sutherland, Director of Sutherland Farrelly Pty Ltd;

(o) Mr Peter John Svanosio, Director of Jacanne Pty Ltd, the owner of blocks of

land located at 195, 197 and 199 McIvor Road, Strathdale;6

(p) Mr Christopher Ronald Thomas, Principal Hydrologist, Environment & Water

Resources at WorleyParsons;

(q) Mr Steven Craig Troon, Managing Director of H. Troon Pty Ltd (“Troons”);

and

(r) Ms Dawna Kathleen Wright, Senior Managing Director at FTI Consulting.

Approach to the evidence

10 In the course of proceedings, Woolworths emphasised a number of times that the

Court should be wary of oral evidence as to events around five years ago,

particularly from witnesses who have or may have an interest in the outcome of the

proceedings. I did not take this submission to be the casting of aspersions on any

individuals, but rather, a submission seeking to draw upon what might be said to be

the realities of human recollection in particular circumstances. The point

emphasised by Woolworths is that evidence provided by contemporaneous

documents should be given great weight and relied upon unless there is compelling

unambiguous oral evidence to the contrary. I did not take NES to be arguing to the

contrary, at least in general principle, but, of course, the parties differed to the extent

that oral evidence might be given greater weight.

11 In any event, these submissions and the nature of the issues raised in this case led

me to mention to the parties the decision of Lewison J (as his Lordship then was) in

the Chancery Division in Foodco Uk LLP v Henry Boot Developments Ltd, where issues

5 Expert Report of Owain Stone (1 May 2015) and Expert Report of Owain Stone (22 May 2015) were

tendered by consent, without the need for Mr Stone to be called: Transcript 543. 6 Outline of Evidence in Reply of Peter John Svanosio (17 March 2015) was tendered by consent, without the

need for Mr Svanosio to be called: Transcript 519.


arose with respect to evidence as to conversations between parties and the weight

that might be given to that evidence as distinct from evidence provided by

contemporaneous written documents.7 Thus, his Lordship said:8

3. The burden of proof lies on the tenants to establish their case. They must persuade me that it is more probable than not that Henry Boot made fraudulent misrepresentations. Although the standard of proof is the same in every civil case, where fraud is alleged cogent evidence is needed to prove it, because the evidence must overcome the inherent improbability that people act dishonestly rather than carelessly. On the other hand inherent probabilities must be assessed in the light of the actual circumstances of the case.

4. Although some of the representations on which the tenants rely were made in writing, in all cases they allege that these representations were confirmed, expanded, or supplemented by oral representations. These oral representations were made in conversations and at meetings of which there is scant record. In approaching the evidence I have tended to place weight on contemporaneous documents and documents which came into existence before the problems emerged. In assessing the recollections of witnesses, it is also important to avoid the benefit of hindsight. I must try to assess what people did, said and thought at the time. In that connection I have borne in mind the words of Lord Pearce in his dissenting speech in:9

Credibility involves wider problems than mere “demeanour” which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person, telling something less than the truth on this issue, or, though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so, has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by overmuch discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was

7 [2010] EWHC 358 (Ch). 8 Foodco Uk LLP v Henry Boot Developments Ltd [2010] EWHC 358 (Ch), [3]–[5] (citations omitted) (“the

Henry Boot case”). 9 Onassis v Vergottis [1968] 2 Lloyd's Rep 403 at 431.


mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness, and motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process and in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part.

5. None of the witnesses had a good recollection of precisely what was said by them or to them in the course of meetings or telephone conversations. Some were clearly reconstructing what, with hindsight, they thought must have happened. I do not, however, consider that any of the witnesses I heard were deliberately giving untruthful evidence. All were doing their honest best.

12 In my view, the approach to the evidence as adopted by Lewison J in the Henry Boot

case is appropriately applied in the present circumstances. I do, however, make the

obvious point that the facts and circumstances before the court in the Henry Boot case

were quite different from those before the Court in the present proceedings and

there was no suggestion in these proceedings that issues of fraud arise, whether by

fraudulent misrepresentations or otherwise. Nevertheless, this does not affect the

approach to the evidence to be applied.

Agreements between the parties

13 The agreements between the parties were, as indicated, constituted by the Letter of

Offer and the Agreement for Lease.

14 For present purposes, the critical provisions of the Letter of Offer are as follows:10

Re: Proposed Woolworths Hardware (Home Improvement) Store 195 McIvor Road, Strathdale

Further to our discussions last week regarding the potential for a Woolworths hardware store at 195 McIvor Road, Strathdale, Woolworths are pleased to provide the following terms and conditions that Woolworths would be willing to enter into an Agreement for Lease and Lease with the Maxi Foods Group for the abovementioned premises, subject to Woolworths Board Approval.

1. Premises

This offer is based on the attached plan (Reference Sketch Design Site Plan – Option 1: SK01 dated 13 May 2009) and the latest discussions and

10 Court Book 1039.


information. In the event of further amendments, redesigns and changes to configuration, Woolworths reserves its right to amend this offer.

2. Lease Area

The total estimated area for the hardware store is 10,535 square metres on a site area of 24,700 square metres (subject to survey).

3. Lessee

Woolworths Limited (ABN 88 000 014 675)

4. Lessor

Maxi Foods Group

…

13. Design Brief

A design brief will be issued in due course which will contain Woolworths’ current standard Specification. The Landlord is to provide a turn-key premises in accordance with the obligations contained in the Specification. Should the design brief differ in cost to other major trade supply/restricted retail premises (full height precast brief), the difference in cost is to be made by payment as a lump sum. Rider Hunt quantity surveyors, are to verify the cost difference.

14. Programming

The Landlord must provide a development program acceptable to Woolworths, which specifies the date of handover following practical completion, for inclusion in the Agreement for Lease. The Landlord must comply with the construction program, with a normal industry allowance for delays.

Woolworths is not obliged to open the store prior to 1 July 2011.

15. Fitout Period

Following the practical completion of works as detailed in the Specification, Woolworths will require a period of 12 weeks to fitout the store prior to opening. The Landlord is to provide uninterrupted access to the Premises for this purpose.

16. Conduct of Works, Schedule of Finishes and Scope of Works

The Landlord must conduct works on site to a high standard. The Landlord will document the project fully and provide all necessary details, contractual clauses and condition precedents regarding the development of the site.

In particular, documents covering Schedule of Finishes and Scope of Works, together with an appropriate Landlord’s Drawing Transmittal schedule, all satisfactory to Woolworths, will be required for inclusion in the Agreement for Lease.


We look forward to the opportunity to collaborate throughout the design phase and to review detailed plans so as to provide our comments on issues including trolley access, sight-lines, services, dock areas, car parking, internal vehicle circulation, lighting, customer access, public safety and customer amenities.

The final plans and specifications for the development are to be to Woolworths’ satisfaction.

…

21. Documentation & Approvals

This offer is subject to:

1. Finalisation of development plans, programming, condition precedents regarding the development, Scope of Works and finishes to Woolworths’ satisfaction;

2. Maxi Foods Group gaining control of all the land on the site in order to undertake the development; and

3. Approval of Woolworths Board.

Approvals by the Woolworths Board, will be operative for a period of 12 months. If formal documentation is not executed within that time, Woolworths can elect to terminate the agreement and withdraw from the project.

…

24. Binding Agreement

Although it is intended that a formal agreement for lease will be executed based on the Woolworths standard documentation, including the commercial terms in this letter, it is intended that acceptance by you of the terms and conditions in this letter will create a binding agreement between you and Woolworths.

The letter was signed on behalf of Woolworths by Mr Macmillan as its Senior

Development Manager and by Mr Blake on behalf of Maxi Foods Group and is dated

2 June 2009.

15 In the present context, the critical provisions of the Agreement for Lease are as

follows:11

Parties

1. North East Solution Pty Ltd (ACN 129 466 851) of 17 Hargraves Street, Castlemaine VIC 3450 (the Landlord);

11 Court Book 2939.


2. Shellbelt Pty Limited (ABN 21 066 891 307) of 1 Woolworths Way, Bella Vista NSW 2153 (the Tenant); and

3. Woolworths Limited (ABN 88 000 014 675) of 1 Woolworths Way, Bella Vista NSW 2153 (the Guarantor).

Recitals

A The Landlord is, or will be entitled to be, the registered owner of the Land.

B The Landlord proposes to undertake the Landlord’s Works.

C The Landlord has agreed to grant and the Tenant has agreed to take the Lease of the Premises, subject to the terms and conditions in this Agreement.

1. Interpretation

1.1 Definitions

The following definitions, together with those in the Reference Schedule, apply unless the context otherwise requires.

…

Briefing Kit means the specification briefing kit to be provided in accordance with clause 2.1, as it may be updated in accordance with clause 3.3(a).

…

Landlord’s Works means the works required to complete the construction of the Improvements as described in the Plans and Specifications.

Landlord’s Works Costs means the estimated costs that will be incurred by the Landlord in constructing the Landlord’s Works based on construction on a level and benched site and excluding costs for works external to the Premises. To avoid doubt it does not include any other costs such as design costs, consultants’ fees and any fees, costs or charges incurred in connection with obtaining the Development Approval.

…

Premises means the home improvement centre identified in the Plans and Specifications and on the Site Plan.

…

Site Plan means a site plan showing the layout of the Store and the Premises on the Land, to be provided by the Tenant to the Landlord pursuant to clause 2.1.

2. Development Approval


2.1 Briefing Kit

The Tenant must, as soon as practicable after the date of this Agreement, and in any case on or before 15 January 2010, develop and give to the Landlord the Briefing Kit and the Site Plan.

2.2 Costs Estimate

(a) As soon as reasonably practicable after receipt by the Landlord of the Briefing Kit the Landlord, acting reasonably and in good faith, must:

(i) determine the Landlord’s Works Costs and advise the Tenant in writing of the Landlord’s Works Costs;

(ii) provide, on an open book basis, its costing of the Landlord’s Works Costs; and

(iii) advise the Tenant whether it requires the Tenant to contribute towards the Landlord’s Works Costs and the amount of that contribution (if any).

(b) The Landlord and the Tenant, acting reasonably and in good faith, must attempt to resolve any differences they may have in relation to:

(i) the Landlord’s determination of the Landlord’s Works Costs; and

(ii) the amount that the Tenant must contribute towards the Landlord’s Works Costs (if any) and the manner in which this contribution will be made.

(c) If, by the later of:

(i) 20 April 2010; and

(ii) the date which is 6 weeks after the date of receipt by the Tenant of notice of the Landlord’s Works Costs,

or such later date to which the parties agree, the Landlord and the Tenant cannot agree on:

(iii) the Landlord’s Works Costs; or

(iv) the amount that the Tenant must contribute towards the Landlord’s Works Costs (if any) and the terms and conditions on which this contribution will be made,

the Landlord or the Tenant may:

(v) terminate this Agreement by giving notice in writing to the other; and

(vi) procure the withdrawal of the application for Development Approval.


(d) Termination of this Agreement pursuant to clause 2.2(c)(v) does not prejudice any claim which either party to this Agreement may have arising from the non-compliance by the other party of any of its obligations under this Agreement.

(e) Subject to each party’s rights under clause 2.2(d), if this Agreement is terminated pursuant to clause 2.2(c), each party will bear their own legal and other costs and expenses in connection with this Agreement arising before termination.

(f) The parties:

(i) acknowledge that to expedite the Development Approval, assistance will be sought from the State Government pursuant to clause 2.8; and

(ii) undertake to monitor, as closely as reasonably practicable, progress of the Government Development Assistance and to inform each other of such progress when known.

(g) Without limiting the Tenant’s obligations under clause 2.2(f), the Tenant undertakes to provide the Landlord with not less than 10 Business Days prior notice of:

(i) the date set down for the closing of the public exhibition of the rezoning of the Land proposed as part of the Development Approval;

(ii) the date set down for any panel hearing required to be held in relation to the application for the Development Approval; and

(iii) to the extent possible, any other material steps to be taken by the State Government as part of the process of its consideration of the Landlord’s application for Development Approval.

…

3. Landlord’s Works

3.1 Completion of Landlord’s Works

The Landlord must at its Cost cause the Landlord’s Works to be carried out:

(a) in accordance with the Plans and Specifications;

(b) in accordance with the Development Approval, all Laws and consents of and complying with the requirements of all Government Authorities;

(c) as expeditiously as possible;

(d) in a proper and workmanlike manner;


(e) under adequate and competent supervision; and

(f) in accordance with the Development Program.

…

6. Tenant’s Works

6.1 Carrying out Tenant’s Works

In carrying out the Tenant’s Works, the Tenant must:

(a) comply, and ensure that the Tenant’s Contractors comply, with the reasonable directions of the Landlord’s Architect for the delivery, unloading and storage of materials;

(b) ensure that the Tenant’s Contractors effect and maintain public liability insurance for cover of not less than $20 million, contractors all risks insurance for a level of cover reasonably satisfactory to the Landlord and workers compensation insurance;

(c) be responsible for all work carried out on the Tenant’s behalf;

(d) ensure that the Tenant’s Contractors remove rubbish and debris on completion of the Tenant’s Works. Any rubbish or debris not removed from the Land by the Tenant’s Contractors may be removed by the Landlord. The costs of removal must be paid by the Tenant; and

(e) pay for the repair of any damage to the Premises caused as a result of the Tenant’s Works.

…

9. The Lease

9.1 Grant of Lease

The Landlord must grant to the Tenant and the Tenant must accept the Lease for the Term commencing on the Commencement Date.

…

11. Termination

If for any reason the Landlord’s Works have not reached Practical Completion by the Termination Date, the Tenant may terminate this Agreement by notice in writing to the Landlord. If the Tenant terminates this Agreement, the Landlord must reimburse the Tenant, on demand, for all Costs and expenses incurred by the Tenant in connection with this Agreement and anything done by the Tenant in relation to this Agreement, and for loss of profits in the amount certified by the Tenant’s Auditor.

…


14. Right of First Refusal – Land

14.1 Offer by Landlord

The Landlord must not:

(a) sell, transfer or otherwise dispose of the Land (or any part of the Land); or

(b) cause or permit any change in shareholding of the Landlord or any holding or parent company of the Landlord as contemplated under clause 10.2(c).

during the period commencing on the date of this Agreement and expiring on the Commencement Date, unless the Landlord first offers to sell the Land (or any part of the Land) to the Tenant by executing and delivering to the Tenant a contract detailing the price and the terms and conditions on which the Landlord intends to sell, transfer or dispose of the Land or any part of the Land.

…

16. Land

(a) The Tenant acknowledges that the Landlord is not the registered proprietor of the Land.

(b) The Landlord warrants that it has no reason to believe that the option to purchase the property comprised in Certificates of Title Volume 8505 Folio 634, Volume 8204 Folio 513, Volume 9051 Folio 930 and Volume 9051 Folio 931 granted to it by the registered proprietors of that property is not valid and enforceable.

(c) The Landlord must use its best endeavours to become the registered proprietor of the Land on or before the Development Approval Date.

(d) If on or before 30 June 2010, the Landlord has not entered into contracts for the purchase of the Land settlement of which will take place no more than sixty (60) days after the Development Approval Date, the Tenant may terminate this Agreement by giving notice in writing to the Landlord at any time prior to the Landlord entering into such contracts.

(e) Subject to paragraph (f), if the Landlord has not become the registered proprietor of the Land on or before the Development Approval Date, the Tenant may terminate this Agreement by giving notice in writing to the Landlord at any time prior to the Landlord becoming the registered proprietor of the Land.

(f) If the Landlord has not become the registered proprietor of the Land on or before the Development Approval Date but has entered into contracts for the purchase of the Land settlement


of which will take place no more than sixty (60) days after the Development Approval Date and the Landlord has proven to the reasonable satisfaction of the Tenant that, despite the fact that it has not become the registered proprietor of the Land by the Development Approval Date, it will be able to comply with its obligations under the Agreement, then the Tenant may not terminate this Agreement under paragraph (e) but, if the Landlord has not become the registered proprietor of the Land on a date which is sixty (60) days after the Development Approval Date, the Tenant may terminate this Agreement by giving notice in writing to the Landlord at any time prior to the Landlord becoming the registered proprietor of the Land.

(g) If this Agreement is terminated pursuant to sub-paras (d), (e) or (f), the Landlord and the Tenant will bear their respective costs and expenses incurred prior to the date of termination.

…

Reference Schedule

Item Number

Item Term

1. Land Certificates of Title Volume 8505 Folio 633, Volume 8505 Folio 634, Volume 8204 Folio 513, Volume 9051 Folio 930, Volume 9051 Folio 931 and Volume 7863 Folio 135

2. Anticipated Date of Practical Completion

The date 12 months after the Development Approval is obtained.

3. Approximate Lettable Area

10,738 square metres.

4. Termination Date The date which is 12 months after the Anticipated Date of Practical Completion (ignoring any extension under clause 3.5)

5. EIS Period 12 weeks

6. Term 12 years

7. Further Terms 6 further terms of 5 years each.

8. Square Metre Rate $120 per square meter

9. Maximum Rent Amount

Not applicable.

10. Development Approval Date

The date which is 18 months after the date of this


Agreement.

…

Annexure A

Plans and Specifications

SITE PLAN SCALE 1:1000 @ A3

Contractual framework

Letter of Offer

16 On 2 June 2009, Woolworths and Mr Blake, on behalf of the “Maxi Foods Group”,

signed the Letter of Offer in respect of a proposed agreement for lease and lease of

the Strathdale site. The principal provisions of the Letter of Offer presently of

relevance have been set out previously.12 The Letter of Offer states expressly in

para 24 that it would, on acceptance by the offeree of its terms and conditions,

“create a binding agreement between you and Woolworths”. Paragraph 24 also

expressly records the intention of the parties that a formal agreement for lease would

12 See above [14].


be executed “based on the Woolworths standard documentation, including the

commercial terms in this letter”. Nevertheless, the manner in which para 24 is

expressed does make it clear that, absent a formal agreement for lease being

executed, there is, nevertheless, a binding agreement created by the Letter of Offer.13

17 The commercial terms included provision for a lease term of 12 years, together with

six five year options for renewal.14 The total estimated area for the hardware store

was 10,535 square metres on a site area of 24,700 square metres (subject to survey).15

Provision was made for a base rent of $1,264,200 per annum, payable as to one

twelfth of that sum monthly.16 This agreed base rent produced a base rent per metre

of $120.17 Provision was made for annual rent increases to CPI, with a cap of four

per cent, including at the commencement of the option periods.18 It was agreed that

the tenant would pay for all services directly supplied to the lease premises and

separately metered, including electricity, gas, telephone and water, and also

separately assessed rates and taxes, including land tax (assessed on a single holding

basis).19

18 The Letter of Offer contemplated in its provisions that the parties to the lease would

be Maxi Foods Group as landlord and Woolworths Limited as tenant.20 Having

regard to the circumstances of the Letter of Offer and the desire of Woolworths to

“roll out” the Masters stores in as short a period as possible, it is probably not

surprising that the parties to the Letter of Offer had not then determined which

corporate entities would be the parties to the contemplated agreement for lease and

lease. In any event, the position of NES with respect to the operation of the

provisions of the Agreement for Lease with respect to the commercial terms

contained in the Letter of Offer would transcend any issues with respect to

13 See Masters v Cameron (1954) 91 CLR 353 at 360. See also John W Carter, Contract Law in Australia

(LexisNexis Butterworths, 6th ed, 2013) [5-02]–[5-04]. 14 See Letter of Offer [5]–[6]. 15 See Letter of Offer [2]. 16 See Letter of Offer [9]. 17 See Letter of Offer [9]. 18 See Letter of Offer [10]. 19 See Letter of Offer [11]. 20 See Letter of Offer [3]–[4].


congruence of parties as between the Letter of Offer and the Agreement for Lease

and, in any event, Woolworths is a defendant and I do not take it to be disputed that

NES is a corporate entity within the “Maxi Foods Group”.

19 The Letter of Offer was also specifically and expressly subject to various

documentation and approvals.21 The documentation required was the finalisation of

development plans, programming, conditions precedent regarding their

development, Scope of Works and finishes to the satisfaction of Woolworths.

Additionally, in terms of matters involving Woolworths, the offer was subject to the

approval of the Woolworths Board. The process of Woolworths Board approval had

been delegated to the Oxygen Property Committee of Management (“the Property

Committee”), which committee was also delegatee of the Board’s power to approve

sites.22 As far as these conditional provisions were concerned, the offer was subject

to the Maxi Foods Group gaining control of all the land on the Strathdale site in

order to undertake the development. Again, as with respect to the parties to this and

contemplated subsequent agreements, there was no specificity with respect to the

corporate entity within that Group which was to obtain the land.

20 In late May or early June 2009, members of the Woolworths Board inspected the

Bendigo site.23 A submission to the Property Committee, on 22 July 2009, noted that

the Bendigo site presented an opportunity for Oxygen to establish a presence within

Bendigo, had excellent exposure to the McIvor Highway, was well suited to service

the Bendigo area and was well positioned to compete with existing hardware stores

in Bendigo. It was also noted in the submission that strong interest in the Strathdale

site had been shown by Bunnings, as a site for its second store in Bendigo. The

Strathdale site was recommended for approval subject to a site visit and

confirmation of whether the strategy for Bendigo was to pursue one or two stores.

The Property Committee approved the Strathdale site on 4 August 2009; a site which

it considered was in a good location. On 11 August 2009, the Maxi Foods Group was

21 See Letter of Offer [21]. 22 Transcript 1084. 23 Transcript 573.


notified of the approval to proceed according to the binding Letter of Offer.

21 Critically, the submission to the Property Committee also included a business case

for the Bendigo site including an amount that Woolworths was prepared to

contribute to the construction of the Bendigo store. The Property Committee was

required to approve the level of contribution that Woolworths would make towards

the construction of a Masters store.24 In the case of the Bendigo site the business case

justified, and the Property Committee approved, a contribution of up to $1.7

million.25 This budget, however, was never disclosed to NES. Moreover,

Woolworths was working to a “target” $12 million store cost based on a 13,500

square metre store. This target was also never disclosed to NES.

22 At the same time that the Property Committee resolved to approve the Bendigo site,

the Committee also resolved that Woolworths would pursue only one store in

Bendigo in the foreseeable future—the One Store Policy.26 At that time, the Bendigo

site was considered to be the best site to serve the entire urban area of Bendigo27 and

the feasibility of the site had been rated “best” amongst the sites being pursued by

Woolworths. The competitive risk from Bunnings was considered to be “high”.28

23 On 25 August 2009, three weeks after the Property Committee approved the binding

Letter of Offer, Woolworths launched its takeover bid to acquire Danks Holdings

Limited (“Danks”).29 In November 2009 and June 2010 Woolworths provided

undertakings to the Australian Competition and Consumer Commission (“ACCC”)

to extend the same terms and conditions to Danks’ members within 10 kilometres of

a Woolworths store to those provided to any other Danks customer, to permit those

members to purchase products from elsewhere and to permit those members to

terminate their agreements with Danks without consequence.30 On 11 November

24 Transcript 1123. 25 Transcript 1124, 1143. See Court Book 1212. 26 Court Book 1232, 1238. 27 Court Book 4488, 4679. 28 Court Book 4682. 29 Transcript 26. 30 Court Book 4535.


2009 the ACCC announced its decision not to oppose the acquisition.31 In spite of

the One Store Policy, Woolworths had identified another Home Timber & Hardware

store in Bendigo, the Hume & Iser site, as a priority site to acquire as part of its

Danks acquisition.32

24 Thus far, it may be thought that the provisions of the Letter of Offer were not

unusual. The circumstances in which the Letter of Offer was developed and agreed

were, however, somewhat out of the ordinary, principally because of the speed with

which Woolworths was concerned to “roll out” 150 “big box” hardware stores

within five years. While, at this time, this strategy had been developed on the part of

Woolworths and critical sites had been identified, the detailed designs and

specifications for the Masters stores were not yet complete and the exact cost to

construct one of these stores to the Woolworths specifications was not then known.

This strategy was developed in early 2009 and, by around September 2009, there was

conflict between the strategic objective on the part of Woolworths of entering the

market quickly, securing key sites before Bunnings could secure them and

establishing an immediate market presence on the one hand; and the practical

necessity of completing the designs and specifications and determining the cost to

complete these specifications before entering into binding agreements on the other.

25 As a result of the Woolworths strategy and the urgency involved, Woolworths

decided to enter into binding agreements to secure the critical sites before Bunnings

could secure them and to make arrangements for their development,

notwithstanding that there was no briefing kit, even if this meant that Woolworths

had to assume the risks of unknown construction costs at the time of entering into

agreements for the development of these sites.33 This position is well illustrated in

email correspondence between Mr Grant O’Brien, then Woolworths’ General

Manager for Business Development, and Mr Champion concerning the Strathdale

31 Transcript 26. 32 Court Book 4448: Project Jupiter – Home Improvement (Project Oxygen) – Board Presentation (26

February 2009. 33 Transcript 722, 724.


site and two other sites on 12 and 13 September 2009, in which Mr O’Brien said:34

[I d]o however want to challenge the “we don’t have a [design] kit response”. Big issue here that really demonstrates what I’m talking about—bunnings have a kit and could, as a result beat us to the punch.

We must find a remedy by Monday to this ie strike a cost above which we contribute—we don’t have a choice …

I remain nervous on these critical issues

And:35

We are aligned—I agree the kits need to be done “tomorrow/asap/ pronto/NOW!!” and I will provide whatever is needed to make this happen.

The point that I was trying to make was not that I am happy for the kits to take weeks, but even if they are 3 days away I still want to make these lease deals more binding right now—even if we expose ourselves to the cost of the unknowns—I don’t want us waiting for the kits—if they come in the next few days that’s a bonus—but we must act as if they are weeks away and we need to protect ourselves as though that were the case.

It is noted that NES contends that this correspondence is admissible for the

construction of cl 2.2 of the Agreement for Lease, in that it casts light on the genesis

of these provisions of the Agreement for Lease, its objective aim and meaning;

relying upon Codelfa Construction Pty Ltd v State Rail Authority (NSW)36 and Brambles

Holdings Ltd v Bathurst City Council.37 In my view this correspondence is admissible

on this basis, though it is not critical to the findings which follow.

26 As appears from the evidence,38 in order to enable Woolworths to bind the owners of

identified critical sites to agreements to develop and lease their land before the

construction costs were known, agreements were entered into whereby:

(a) the rent to be paid by Woolworths for the developed site would be fixed (by

reference to the cost to construct an equivalent store to Bunnings’

specifications, which specifications and costs were known);

34 Court Book 1640. 35 Court Book 1639. 36 (1982) 149 CLR 337 at 347–52. 37 (2001) 53 NSWLR 153 at 163 [24]. 38 See especially Transcript 117.


(b) if the cost to construct the store to the Woolworths plans and specifications

exceeded the cost to construct the store to Bunnings’ specifications (which

was expected to be the case given the higher specifications), Woolworths

would pay the landlord, by way of a lump-sum contribution to the

construction costs, the difference between the actual cost to construct the

Masters store and the cost that had been estimated to construct an equivalent

Bunnings store (on which the rent had been based); and

(c) the difference between the cost to construct the Masters store in accordance

with Woolworths’ plans and specifications and the cost to construct an

equivalent Bunnings store in accordance with the Bunnings specifications,

being the amount to be contributed by Woolworths, was termed the

Landlord’s Works Costs.

27 It followed that at the time the Letter of Offer was agreed, Woolworths had not

developed a design brief of the proposed store at the Strathdale site and,

consequently, it was simply not possible for the parties to agree on the cost

difference between the development and construction of that store and an equivalent

Bunnings store on that site. As a result, Woolworths and the Maxi Foods Group

agreed that “Rider Hunt quantity surveyors, are to verify the cost difference” once

the Woolworths design brief was issued containing the then current standard

specifications to the proposed new store.39 The parties did not specify what the cost

of a Bunnings store was, or even specify a particular Bunnings design brief that was

to be used by Rider Hunt in verifying the cost difference, or whether the entire cost

of construction for each type of store was to be compared. For example, it is not

specified whether the cost comparison would exclude certain categories of cost, such

as site costs. The Letter of Offer also provided for payment of the difference in cost

as a lump sum, but without specifying the time of payment. The latter also became

an issue between the parties, though Mr Champion’s evidence was to the effect that

all the leasehold deals that had been done by Woolworths involved an agreement to

39 See Letter of Offer [13].


pay the difference between the Masters and Bunnings costs after the commencement

of the lease.40

Agreement for Lease

28 On or about 24 February 2010, the Agreement for Lease was executed.41 The critical

provisions of the Agreement for Lease have already been set out.42 The commercial

terms of the Agreement for Lease were the same as the Letter of Offer as to the lease

term, options to renew the lease and the base rent rate. The proposed area for lease

was, however, increased to 10,738 square metres, as opposed to 10,535 square metres

under the Letter of Offer. The parties had not, however, by this time, agreed the cost

of the relevant construction works, now defined in the Agreement for Lease as

“Landlord’s Works Costs” for the Strathdale site, how much Masters would

contribute to those costs or the time and manner at and in which Masters would

make that contribution. Thus, the mechanism adopted was to define Landlord’s

Works Costs in relatively general terms, as follows:

Landlord’s Works Costs means the estimated costs that will be incurred by the Landlord in constructing the Landlord’s Works based on constructions on a level and benched site and excluding costs for works external to the Premises. To avoid doubt it does not include any other costs such as design costs, consultants’ fees and any fees, costs or charges incurred in connection with obtaining the Development Approval.

This general definition was, in turn, supported by the provisions of cl 2.2 of the

Agreement for Lease, which, putting it in very general terms and subject to the

discussion of these provisions which follows in the course of these reasons, required

the parties to resolve these matters between themselves, acting in good faith. Prior

to this process, or in aid of it, cl 2.1 of the Agreement for Lease required the Tenant,

now Shellbelt Pty Limited (guaranteed by Woolworths Limited) to develop and

provide to the Landlord (now North East Solution Pty Ltd, the Plaintiff) the

40 Transcript 997. 41 Transcript 997. 42 See above [15].


“Briefing Kit” and the “Site Plan”.43

29 Woolworths contend that cl 2.2 of the Agreement for Lease anticipated a materially

different method for resolving outstanding issues with respect to the construction

costs—the Landlord’s Works Costs—how Masters would contribute to those costs

and the manner in which they would be paid from the method adopted in the Letter

of Offer. More particularly, they contend that:

(a) the Letter of Offer had provided that the differences in cost between the

Masters store and a Bunnings store was to be “verified” by Rider Hunt. It is

said, that, on its face, this left the final say on this key matter entirely to Rider

Hunt. On the other hand, it is said, that cl 2.2 of the Agreement for Lease

anticipated that NES would:

(i) first “determine” the Landlord’s Works Costs;

(ii) provide its costing of the Landlord’s Works Costs to Masters on an

open book basis;

(iii) advise Masters if it required Masters to contribute to the Landlord’s

Works Costs; and

(iv) with Masters, acting reasonably and in good faith, “attempt to resolve

any differences they may have” as to, among other things, the

Landlord’s Works Costs and how much Masters would contribute to

the Landlord’s Works Costs.

Thus, it is said that, the “determination” by NES was in no way binding upon

the parties, and it was agreed that NES and Masters would negotiate and

attempt to agree the Landlord’s Works Costs, how much Masters would

contribute to the Landlord’s Works Costs, as well as how any contribution

would be paid. On this basis, Woolworths contend that these provisions are,

43 Both the expression “Briefing Kit” and the expression “Site Plan” are defined in clause 1.1 of the

Agreement for Lease: See above [15].


classically, an agreement to agree, accepting that the parties were bound to

conduct such negotiations reasonably and in good faith.

(b) the Letter of Offer provided that the tenant was to pay the whole of the

difference in cost as between the construction of a Masters store and a

Bunnings store. On the other hand, it is said that cl 2.2 of the Agreement for

Lease did not even make reference to the calculation of any difference.

Rather, it left the amount that Masters would contribute to the Landlord’s

Works Costs entirely open to good faith negotiations. Moreover, Woolworths

emphasise in their contentions in this respect that the Agreement for Lease

did not necessarily contemplate any contribution to Landlord’s Works Costs.

Moreover, it is said that, as Mr Blake’s evidence made plain, it was also

possible that NES would make a payment to Masters;44 and

(c) the Letter of Offer provided that the tenant was to pay the difference in the

cost of construction as between a Masters store and a Bunnings store as a

lump sum. It is observed that, on the other hand, cl 2.2 of the Agreement for

Lease provided that if the parties agreed that the Tenant would make a

contribution to the Landlord’s Works Costs, the parties were also to negotiate

and attempt to agree the manner in which such contribution would be made.

Thus, it is said that this, again, was a matter left entirely open to good faith

negotiations.

30 It is also observed by Woolworths that cl 2.2 of the Agreement for Lease did,

however, provide a certain timeframe within which the parties were to agree the

various outstanding matters. They were to do so by the later of 20 April 2010 and

the date six weeks after Masters received a notice from NES of its “determination” of

the Landlord’s Works Costs, or such later date that may be agreed. If agreement was

not reached within that time on each of these matters, then either party could

terminate the Agreement for Lease.

44 See Transcript 189.


31 NES, on the other hand, contends that the effect of the Agreement for Lease,

particularly cl 2.2, is much more than simply an agreement to agree and did, as the

parties intended, incorporate the commercial terms and the agreement which was

contained in the Letter of Offer. In aid of this position, NES makes reference to the

rules of construction which have been accepted by the courts with respect to

commercial contracts of this kind. It is, therefore, to these principles to which I now

turn briefly as providing a basis to the contentions which follow.

32 As is contended, the principles of contractual interpretation are well established and

are not in this context, as distinct from their application, in controversy between the

parties. In order to determine the meaning or legal effect of a particular contractual

term, the court must construe the contract as a whole.45 Interpretation of a

commercial document requires attention to the purpose of the transaction and the

objects which it is intended to secure.46 Commercial documents of this kind are to be

construed practically and so as to give effect to their “presumed commercial

purposes”.47

33 The second important principle is where the language of the commercial contract is

ambiguous or susceptible of more than one meaning, evidence of the surrounding

circumstances is admissible to assist in the interpretation of the contract.48 The

objective theory of contract is not, however, departed from in this process as the

surrounding circumstances to which reference may be made are the objective

framework of facts within which the contract came into existence.49 This includes

evidence of the “genesis” and the objective “aim” of the transaction.50

34 The third principle is that where the language of a contract is open to more than one

interpretation, the court should prefer a construction that does not lead to capricious

45 Bettini v Gye (1876) 1 QBD 183 at 188; Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR

(NSW) 632 at 641. 46 Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 65 [96]. 47 Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170

ALR 579 at 584 [24]. 48 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352. 49 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352. 50 Prenn v Simmonds (1971) 1 WLR 1381 approved by the High Court in DTR Nominees Pty Ltd v Mona

Homes Pty Ltd (1978) 138 CLR 423 at 429.


or unreasonable results.51 This principle is applicable even though the construction

adopted may not represent the most obvious or grammatically accurate

interpretation.52 The fact that a particular construction leads to an unreasonable

result must be a relevant consideration, as it is unlikely that the parties intended

such a result.53 In circumstances such as this, the language of the contract must be

made to yield to “business common-sense”.54 The underlying assumption behind

this principle, which accords with ordinary experience, is that commercial parties

will not enter into contracts for capricious or unreasonable results, at least in the

course of ordinary commercial relations. True it is that some capricious or

unreasonable results may be desired by a party in certain circumstances, but these

circumstances are usually those addressed by legislation such as the Australian

Consumer Law or, for example, by equity in relieving against certain unconscionable

bargains. These are, however, not the sort of circumstances that arise in the ordinary

course of commercial agreements. Also, in the application of a principle such as this,

courts must take care not to impose their own views as to what they think “business

common-sense” might be in particular circumstances. Rather, what amounts to

“business common-sense” must be gleaned from the commercial contract and its

context and objective matters to which courts may have regard. Thus, when

interpreting a contract, a presumption is applied by the courts that the parties did

not intend the terms of the contract to operate unreasonably.55 Where a particular

construction would achieve an unreasonable result, a court will be reluctant to

accept that this was meant by the parties.56 A common sense approach is taken with

an emphasis on the need to arrive at an interpretation which is practical and

commercially sensible; having regard to the proper role of a court in this respect, to

51 Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 50 [12] citing Australian Broadcasting Commission

v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109. 52 Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 50 [12] citing Australian Broadcasting Commission

v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109. 53 Memery v Trilogy Funds Management Ltd [2012] QCA 160, [14] quoting Elderslie Property Investments No

2 Pty Ltd v Dunn [2008] QCA 158, [20]–[22]. 54 Memery v Trilogy Funds Management Ltd [2012] QCA 160, [14] quoting Elderslie Property Investments No

2 Pty Ltd v Dunn [2008] QCA 158, [20]–[22]. 55 Hankey v. Clavering [1942] 2 KB 326 at 329–30. 56 See, eg, Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 at 464.


which reference has been made.57

35 The fourth and perhaps most important and overriding principle or consideration is

that the courts will look to enforce agreements that have been freely entered into by

the parties and to give effect to the objective intention of the parties, rather than to

avoid the agreements.58 The court will be slow to find ambiguity or uncertainty in a

commercial contract where the intention of the parties can be reasonably inferred.59

36 Thus, it is contended by NES that the Letter of Offer and the Agreement for Lease

are clear and unambiguous in their terms, and that the intention of the parties is

clear from the surrounding circumstances. Moreover, it is contended that it is well

established that the terms of a contract will include those terms that the parties

objectively intended to include in it.60 This includes not only those terms that are

articulated in the written document but also, where the nature and context of the

transaction requires it, unexpressed content that it can legitimately be inferred was

intended by the parties.61 Terms such as this are to be inferred, rather than implied,

on the basis of the objective intention of the parties.62

37 Thus, in the present circumstances, NES contends that to the extent that it is

necessary to determine whether or not terms of the Letter of Offer are incorporated

into the Agreement for Lease,63 either by inference or by implication, the intention of

the parties is clear in that para 24 of the Letter of Offer relevantly provided that the

Agreement for Lease was to include “the commercial terms in this letter”.

57 See, eg, Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 708–9 (practical, businesslike and commercially

realistic interpretation); Attaleia Marine Co Ltd v Bimeh Iran (Iran Insurance Co) (The Zeus) [1993] 2 Lloyd’s Rep 497 at 500 (construction of insurance policy so as to achieve sensible business efficacy).

58 Watson v Phipps (1985) 60 ALJR 1 at 3; Fitzgerald v Masters (1956) 95 CLR 420; Secured Interest Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596.

59 Upper Hunter County District Council v Australian Chilling & Freezing Co (1968) 118 CLR 429; Meehan v Jones (1982) 149 CLR 571; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 616–17. See also Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326.

60 Riverwood International Australia Pty Ltd v McCormick (2000) 177 ALR 193 at 208. 61 See Nick C Seddon, Rick A Bigwood and Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract

(LexisNexis Butterworths, 10th ed, 2012) [10.18]. 62 Hawkins v Clayton (1988) 164 CLR 539 at 570; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422;

Breen v Williams (1996) 186 CLR 71 at 91. 63 For example, if it was necessary to determine whether the contribution payment was to be paid as a

“lump sum” as provided by cl 13 of the Letter of Offer.


Consequently, it is submitted that in order to give effect to the intention of the

parties, as stated, it must follow that where a commercial term in the Letter of Offer

has not been included in the Agreement for Lease, then that term will be

incorporated by inference into the Agreement for Lease. Similarly, where the

Agreement for Lease is silent on a commercial term, or part of a commercial term,

such as the method of payment of the Landlord’s Works Costs, then that term will

also be incorporated. It is submitted that it is only where the Agreement for Lease

expressly purports to vary or rescind the existing agreement—the terms of which

were agreed to be incorporated—or contains a term that expressly contradicts a

commercial term in the Letter of Offer, that it should be inferred that the parties

intended for the Letter of Offer or any of its terms to be discarded or disregarded.

Thus, it is contended that the Court should construe both the Letter of Offer and the

Agreement for Lease so as to do the least harm to what the parties objectively

intended.

38 Additionally, it is contended that, in equity, where the Letter of Offer promises the

inclusion of terms in the Agreement for Lease, but such terms are omitted, equity

will take as done that which ought to have been done absent evidence of an intention

to vary the original agreement.64

39 For these reasons, NES contends that the requirement that the Masters contribution

be paid by a lump sum, for example, which is contained in para 13 of the Letter of

Offer, a commercial term that is not inconsistent with any express term in the

Agreement for Lease, will be taken to be incorporated by inference or implication

into the Agreement for Lease. The same, it is said, will be true of the requirement in

para 13 of the Letter of Offer that any cost difference be verified by Rider Hunt, the

nominated quantity surveyors. Additionally, it is submitted by NES that the parties

have in fact acted as if these contractual terms from the Letter of Offer had been

incorporated in the Agreement for Lease. An example contended for by NES is the

permitting of Rider Hunt to conduct the open book review process, as further

64 Porters v Cessnock City Council (2005) 12 BPR 23,209; Re Anstis (1886) 31 Ch D 596; De Beers Consolidated

Mines Ltd v British South Africa Co [1912] AC 52 at 65–6; Frederick v Frederick (1721) 93 ER 632.


evidence of the common assumption of the parties that the commercial terms of the

Letter of Offer be incorporated into the Agreement for Lease. With respect to this

example, it should be noted that there is controversy between the parties as to the

nature of the open book process and which party was required to initiate and carry

out the process. In any event, returning to the contentions of NES, it is said that, if

necessary, the departure from any such common assumption of the kind to which

reference has been made would give rise to a conventional estoppel.65

40 In relation to the interaction between the Letter of Offer and the Agreement for

Lease, the contention of Woolworths is that the latter, formal agreement, replaced

the former entirely.

41 More particularly, as a matter of pleading, Woolworths draw attention to paras 4, 7

and 8 of the Further Amended Statement of Claim (“the FASC”)66 which plead two

agreements to lease—the Letter of Offer and the Agreement for Lease, and plead that

the first was “succeeded and replaced” by the second, except where there were

commercial terms that had not been superseded by or in conflict with the second,

such terms being incorporated into the second.67 It is said, however, that the FASC

does not identify the commercial terms of the first agreement that it says were not

superseded by or in conflict with the second agreement. This pleading is not,

however, in my view, inconsistent with the position contended for by NES and, to

the extent that the pleading does not identify commercial terms, I am of the opinion

that it is clear from the manner in which the case was conducted by the parties that

the relevant commercial terms the subject of contentions by NES in this respect are

clear; particularly having regard to the relative brevity and, though perhaps

deceptive, simplicity of the provisions of the Letter of Offer and the Agreement for

Lease.

42 Woolworths also draw attention to the fact that the parties to the Letter of Offer and

65 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR

226 at 244; Davis v CGU Insurance Ltd (2009) 104 SASR 422; Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd (2008) 66 ACSR 594 at 602 [27], 629 [164].

66 Further Amended Statement of Claim (25 May 2015) [4], [7]–[8]. 67 Defendants’ Closing Submissions (3 September 2015) [42].


the Agreement for Lease—both as to the landlord and the tenant—are different.

Consequently, it is submitted that by the execution of the second agreement, the

Agreement for Lease, the parties to the first, the Letter of Offer, must be taken to

have agreed to the first agreement having been discharged. That is, each agreement

was for a lease over the same land. The different landlords could not each have

granted a lease to the different tenants. Thus, it is said that the only live question is

whether any of the terms of the Letter of Offer survive, in effect, as implied terms in

the Agreement for Lease. In this respect it is also said that, at trial, Senior Counsel

for NES eschewed any intention to seek rectification of the Agreement for Lease, but

said that the “commercial terms” of the Letter of Offer would be incorporated into

the Agreement for Lease and that para 13 was one of the commercial terms.68

Indeed, this is the position contended for by NES and, on this basis, rectification

would not be necessary as the commercial terms of the Letter of Offer would simply

survive by way of incorporation or implication in the Agreement for Lease and it

would also follow that the differences in parties would not be significant. Moreover,

as has already been observed, the parties to the Agreement for Lease are not

strangers to the entities which were parties to the agreement the subject of the Letter

of Offer. Thus, when one is looking at the objective factual matrix from the

perspective of the Agreement for Lease and through the eyes of the parties to that

agreement, it would be artificial in the extreme to treat the commercial terms and

background to the Letter of Offer as extraneous to those in which the terms of and

hence the construction of the provisions of the Agreement for Lease, is to take place.

43 Again, with reference to the pleadings, Woolworths made submissions with respect

to terms alleged by NES to be implied into the Agreement for Lease, “in order to

give business efficacy” to that agreement.69 These terms, apparently taken from or

based on para 13 of the Letter of Offer, are as follows:

(a) that the design brief would contain the current standard specification of the

guarantor (Woolworths);

68 Transcript 35–6. 69 Further Amended Statement of Claim (25 May 2015) [10].


(b) that should the design brief differ in cost from other major trade

supply/restricted retail premises (full height precast brief), the difference in

cost was to be paid by Masters by lump sum payment to NES; and

(c) that Rider Hunt were to verify the cost difference on behalf of Woolworths.

Woolworths also say that it should be noted that this alleged implied term differs in

a material respect from para 13 of the Letter of Offer in that the latter does not

contain the qualification “on behalf of Woolworths”. That is, it is said, that by

para 13 of the Letter of Offer, it is arguable that Rider Hunt were to bind both

parties.

44 With respect to these alleged implied terms, Woolworths say that they are not

required to give business efficacy to the Agreement for Lease and that they are also

inconsistent with the express wording and, or alternatively, the scheme or effect of

cl 2.2 of the Agreement for Lease and cannot, consequently, be implied.70

Specifically, it is contended that:

(a) to the extent that the first alleged implied term is intended to be a reference to

the “Briefing Kit” defined in cl 1.1 of the Agreement for Lease,71 then such an

implied term is not required to give business efficacy to the Agreement for

Lease. To the extent that it is a reference to something else, it is inconsistent

with cll 1.1 and 2.1 of the Agreement for Lease;

(b) the second alleged implied term is inconsistent with cl 2.2 of the Agreement

for Lease in a number of respects. That is, cl 2.2:

(i) makes no reference whatsoever to a Bunnings design brief;

(ii) leaves it to the Landlord, in the first instance, to determine the cost of

the construction for the Briefing Kit;

(iii) leaves it entirely open as to the basis upon which the Landlord might

70 Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507. 71 As the “specification briefing kit to be provided in accordance with clause 2.1”.


determine the amount it asks the Tenant to contribute to the cost of

construction; and

(iv) makes no mention of any such contribution being paid as a lump sum.

Indeed, it expressly identifies that the manner in which such

contribution is to be paid (if agreed) is to be a matter for further

agreement; and

(c) the third alleged implied term is also contrary to cl 2.2 of the Agreement for

Lease. By cl 2.2, Rider Hunt has no prescribed role. Clause 2.2(b) anticipates

that the parties will attempt to resolve by agreement any differences they

have. It was left up to the parties, unfettered by anything other than an

obligation to act reasonably and in good faith, to determine how to resolve

any differences, including whether or not to engage or involve third parties.

Rider Hunt were not required to verify anything and neither Woolworths nor

NES were bound by any “verification” given by Rider Hunt.

Woolworths also make the point that the Lease contains an entire agreement clause

which records, significantly it is said, that the Agreement for Lease and the Lease

record the entire agreement of the parties in relation to the Strathdale site.72

45 Concluding their submissions in this respect, Woolworths make reference to the

operation of cl 2.2 of the Agreement for Lease as they say it is seen by NES as

indicated by its pleadings in the FASC.73 On the basis of these pleadings,

Woolworths contend that the NES position is as follows:

(a) NES pleads compliance by NES with cl 2.2(a) of the Agreement for Lease

(determination of Landlord’s Works Costs, provision of open book costings

and the advice as to the required contribution by the Tenant);74

(b) NES pleads that Rider Hunt then verified, on behalf of Woolworths, the

72 But see below [46]. 73 Further Amended Statement of Claim (25 May 2015) [12]–[15]. 74 Further Amended Statement of Claim (25 May 2015) [12].


difference between the Landlord’s Works Costs and the cost of the Bunnings

brief75—presumably, therefore, allegedly settling that difference insofar as

Woolworths were concerned.76 The scheme of the pleadings is, it is said, that

at this stage in the process, Rider Hunt’s role is complete; and

(c) thereafter, and consistent with other pleadings,77 the posited process

anticipates that NES and Masters would seek to resolve such differences, as

verified by Rider Hunt, directly between them. That is, so it seems, by a

process of commercial negotiation, acting reasonably and in good faith.78

46 In my view, the principles applicable to the construction of commercial contracts,

such as the Letter of Offer and the Agreement for Lease, the subject of submissions

by NES are applicable in the present circumstances and would enable NES to call in

aid the provisions of the Letter of Offer insofar as they have not been abrogated or

varied by clear provisions of the Agreement for Lease. For the preceding reasons the

entire agreement provisions to which Woolworths make reference do not provide

anything in the nature of such an abrogation or variation.79 Quite clearly, the

commercial parties to the Letter of Offer intended its terms to have meaning and to

be binding. It follows that the commercial context and the factual matrix in which

the Agreement for Lease was entered into by corporate entities associated with and

contemplated, at least in general terms, by the parties to the Letter of Offer must be

accommodated and given effect to by implication or incorporation into the terms of

the Agreement for Lease. The consequences in terms of the nature and effect of the

contractual obligations between the parties to the Agreement for Lease are matters to

which I now turn.

75 In its further and better particulars, NES says that Rider Hunt’s “verification … on behalf of Masters

and Woolworths is particularised in” a report that Rider Hunt prepared for Mr Macmillan on or about 22 April 2010. See Answers to the Request by the Defendants for Further and Better Particulars of the Plaintiff’s Statement of Claim and Reply (27 August 2012) [4]: Court Book 59.

76 Further Amended Statement of Claim (25 May 2015) [13]. 77 Further Amended Statement of Claim (25 May 2015) [14]–[15]. 78 See also Further Amended Statement of Claim (25 May 2015) [15(viii)]. 79 See above [44].


Nature and effect of contractual obligations

47 In terms of the nature and effect of the contractual obligations, particularly cl 2.2 of

the Agreement for Lease and para 13 of the Letter of Offer, the parties differ. The

principal differences between the parties in this respect are that, as indicated thus

far, NES contends for the continued operation of the provisions of the commercial

terms contained in the Letter of Offer with respect to the nature and effect of the

contractual obligations under the Agreement for Lease, whereas Woolworths

contend that the latter, formal agreement, stands independently of the Letter of Offer

provisions. Additionally, and importantly, NES contends that cl 2.2 of the

Agreement for Lease provides an enforceable mechanism for resolving differences

between the parties with respect to the Landlord’s Works Costs and related matters,

whereas Woolworths contend that the effect of cl 2.2 in this respect is really nothing

more than an agreement to negotiate which, consequently, produces no enforceable

outcomes. I turn now to some particular aspects of these differences of approach.

48 Woolworths contend that cl 2.2 of the Agreement for Lease anticipates four distinct

stages. First, determination of Landlord’s Works Costs and the Tenant’s

contribution;80 secondly, identification of any differences; thirdly, attempted

resolution of any differences;81 and, if any differences are not resolved by a defined

date, termination of the Agreement for Lease.82

49 As to the first stage, Woolworths contend that all of the action takes place, or must

take place, at the hands of the Landlord, NES. They say that before Masters is

required to do anything, NES must do four things. First, “determine” the Landlord’s

Works Costs; secondly, advise the Tenant of its “determination”; thirdly, provide to

the Tenant its “open book costing” of the Landlord’s Works Costs; and fourthly,

advise the Tenant whether it requires the Tenant to contribute towards the

Landlord’s Works Costs and the amount of such contribution. In this context,

Woolworths also contend that no guidance is given to NES as to how it is to

determine the Landlord’s Works Costs or the amount of any contribution it may

80 Agreement for Lease, cl 2.2(a). 81 Agreement for Lease, cl 2.2(b). 82 Agreement for Lease, cl 2.2(c).


require from the tenant to the Landlord’s Works Costs. It is said, however, that this

does not create any uncertainty in the process, as it is left entirely to NES to tell the

Tenant how any such contribution ought to be paid. As a matter of fact, in the

present circumstances, Woolworths contend that NES did not tell Masters how it

required any contribution to be paid to it until 6 April 2010.83

50 At the second stage, which Woolworths say is reached before the provisions of

cl 2.2(b) of the Agreement for Lease apply with respect to the third stage, there must

be identification of the differences, if any, as to these matters. In other words, it is

submitted, it was only at the point that the parties knew what the differences were

that they could attempt to resolve those differences by negotiation. Further, it is

said, the contract clearly anticipates that before the parties attempt to resolve the

differences, the Landlord, NES, must provide its open book costing of the Landlord’s

Works Costs. It is said that this was clearly required in order for the parties, acting

reasonably and in good faith, to identify items of cost wrongly included in the

Landlord’s Works Costs, or wrongly calculated.

51 Woolworths contend that at the third stage, the parties were to attempt to resolve

any differences as to three things. They are, first, the Landlord’s “determination” of

the Landlord’s Works Costs; secondly, the amount, if any, that the Tenant must

contribute to the Landlord’s Works Costs; and thirdly, the manner in which any

contribution is to be paid.84

52 At the fourth stage, Woolworths contend that either party may terminate the

Agreement for Lease if by, in the present case, 20 April 2010, agreement had not

been reached on the amount of the Landlord’s Works Costs, the amount that the

Tenant must contribute to the Landlord’s Works Costs and the manner in which it

must do so.85

53 Thus, Woolworths contend that crucial to the process was the obligation on NES to

83 Court Book 3353–4. 84 See Agreement for Lease, cl 2.2(b). 85 See Agreement for Lease, cl 2.2(c).


provide its open book costing of its determination of the Landlord’s Works Costs

and the identification of any differences. In other words, it is said, the obligation to

resolve the differences and, therefore, to act reasonably and in good faith in so

doing, only arose once the open book costing had been provided and the differences

had been identified. These were preconditions, it is contended by Woolworths, to

the obligation to resolve and negotiate the differences. In the present case,

Woolworths contend that the evidence shows that these preconditions were never

satisfied.

54 Moreover, as is discussed further, Woolworths contend that neither the Letter of

Offer nor the Agreement for Lease provided any guidance to NES or to Woolworths

as to how to go about resolving any differences as to these matters. That is, the

Agreement for Lease pointed to no external standard to apply for the calculation of

the Landlord’s Works Costs or the cost of constructing “other major trade

supply/restricted retail premises (full height precast brief)”.86 Additionally, it is said

that the Agreement for Lease provided no process to follow or principle to apply to

resolve any differences as to these matters. Thus, Woolworths offer the observation

that having regard to these uncertainties, it is hardly surprising that the parties were

confused as to the process to be followed in order for agreement to be reached.

55 NES, on the other hand, contends that the provisions of cl 2.2 of the Agreement for

Lease are clear and unambiguous, and that the provisions of that clause are neither

too illusory, too vague nor too uncertain to be enforceable. As discussed previously,

this position is consistent with, and flows from, the reading of the provisions of cl 2.2

in their factual matrix and, particularly relevantly, the provisions of para 13 of the

Letter of Offer. In other words, the agreement between the parties, NES contends, is

quite clear and, broadly speaking, involves a payment by Woolworths or one of their

subsidiaries of a sum towards what is styled as “Landlord’s Works Costs”, being the

difference between the cost of constructing a Bunnings store as compared to the cost

of constructing a Masters store on the Strathdale site. Given the uncertainties

86 Letter of Offer [13].


involved as a result of the rapid rollout of Masters stores, as has been discussed, and

the absence of detailed design briefs, the agreement between the parties relied upon

determination of the Landlord’s Works Costs on good faith dealings between them.

Thus, the question becomes whether the provisions of cl 2.2 of the Agreement for

Lease insofar as they rely upon negotiation reasonably and in good faith, provide a

certain and enforceable obligation or whether it merely constitutes, as Woolworths

contend, an agreement to negotiate. For the preceding reasons and those which

follow, I am of the view that the provisions of cl 2.2 of the Agreement for Lease are

sufficiently certain to be enforceable. I turn now to consider the position with

respect to negotiating reasonably and in good faith on the basis of the authorities.

56 As a general proposition, the authorities establish that an agreement to negotiate

“reasonably” and “in good faith” is sufficiently certain to be enforceable. In this

context, NES submits that the duty contained in cl 2.2(b) of the Agreement for Lease,

to act reasonably and in good faith so as to resolve any differences the parties may

have in relation to the calculation of construction costs of the development on the

Strathdale site is, in its context, clear and has a sensible and ascribable meaning.

Consequently, it is contended that it should therefore be enforced. In this respect,

reference is made to the judgment of Allsop P (as the Chief Justice then was) in

United Group Rail Services Ltd v Rail Corporation of New South Wales, where his Honour

said:87

If business people are prepared in the exercise of their commercial judgement to constrain themselves by reference to express words that are broad and general, but which have sensible and ascribable meaning, the task of the Court is to give effect to, and not to impede, such solemn express contractual provisions.

57 It is the position, as identified by Woolworths, that the good faith obligation has

been the subject of extensive judicial and academic analysis and that there does

remain considerable debate regarding the proper definition and scope of the

obligation.88 Moreover, it is clear from the authorities that the content of the

87 (2009) 74 NSWLR 618 at 639 [74]. 88 See generally Elisabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths,

2003).


obligation is context-dependent and moulded according to the relevant

circumstances. Of course, having regard to the nature of the obligation, this is

unsurprising. The context here, as Woolworths contend, is an obligation on the part

of sophisticated commercial parties to act “reasonably and in good faith” in

attempting to agree outstanding commercial terms. The parties were not fiduciaries

and there was no special character or quality to the relationship between them.

Moreover, it is said that there was also no dependency or long term intersection of

interests, as is typically the case in, for example, the franchising context. Although it

might be said that the latter proposition is not so clear in the present context having

regard to the long term leasing arrangements provided for in the Agreement for

Lease, this does not, in my view, affect the nature and content of the good faith

obligation in the present context.

58 It is also clear from the authorities that a breach of the good faith obligation will not

be made out even if the court finds that the processes followed by the relevant party

were sub-optimal or, with the benefit of hindsight or otherwise, the responses or

steps taken could have been more helpful. More is required to make out a breach of

an obligation to act in good faith.

59 A formulation of the good faith obligation to which reference is often made was

provided by Sir Anthony Mason in an address given at the University of Cambridge,

in which he noted that the concept of “good faith” embraced three related notions,

namely: an obligation on the parties to cooperate in achieving the contractual objects

(loyalty to the promise itself); compliance with honest standards of conduct; and

compliance with standards of conduct that are reasonable having regard to the

interests of the parties.89

60 Allsop P (as the Chief Justice then was) similarly described the “usual content” of the

obligation of good faith, based on a line of authorities from the New South Wales

89 Sir Anthony Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 Law

Quarterly Review 66. See Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 335–6 [49], 348 [92]; Alcatel Australia v Scarcella (1998) 44 NSWLR 349; Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 at 570 [169]–[173]; Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [64].


Court of Appeal, as follows: obligations to act honestly and with a fidelity to the

bargain; obligations not to act dishonestly and not to act to undermine the bargain

entered or the substance of the contractual benefit bargained for; and obligations to

act reasonably and with fair dealing having regard to the interests of the parties

(which will, inevitably, at times conflict) and to the provisions, aims and purposes of

the contract, objectively ascertained.90

61 The notions or elements inherent in the good faith obligation to which reference has

been made are not, however, to be regarded as a code, or to be applied

independently of each other.91 Various authorities and commentaries have spoken

in terms of conduct that involves “bad faith” or that violates community standards

of decency, fairness and reasonableness,92 an obligation not to act capriciously,93 or

not acting in an arbitrary manner or for an extraneous purpose.94 Although it has

been said that ideas of unconscionability, unfairness and lack of good faith “have a

great deal in common”,95 it does not follow that these concepts are synonymous;

indeed, the authorities demonstrate the contrary. Nevertheless, it is clear that an

obligation to act in good faith does not require one contracting party to subordinate

their interests to those of another.96

62 The obligation to act in good faith was again discussed in detail quite recently by the

90 Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA

268, [12] citing Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91, Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558, Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 and United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618. See also the important judgment of Kirby P (as he then was) in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1; Chief Justice James Allsop, “Some Reflections on Good Faith in Contract Law” (Speech delivered to the Oxford University Obligations Group, 2012); Chief Justice Marilyn Warren, “Good Faith: Where Are We At?” (2010) 34 Melbourne University Law Review 344.

91 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 348 [92]. 92 Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33 at 50–1 [56], referring to commentary to

S2-103(1)(b) of the United States Uniform Commercial Code. See also the brief survey of “persuasive cases in influential jurisdictions in the United States” given by Allsop CJ in Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584 at 651 [291].

93 Gary Rogers Motor (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, [37]. 94 Alcatel Australia v Scarcella (1998) 44 NSWLR 349 at 368; Far Horizons v McDonald’s Australia [2000]

VSC 310, [120]. 95 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 268. 96 Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584.


Full Court of the Federal Court, where Allsop CJ discussed and reaffirmed the

notions or elements inherent in the obligation, by reference to the developing

jurisprudence:97

[287] … [Good faith] is a conception that has been recognised (though not by all courts in Australia) as an implication or feature of Australian contract law attending the performance of the bargain and its construction and implied content.98 Yet, good faith in the performance of contracts is well-known to the common law and to civilian systems. It is a good example of the presence of values in the common law. I repeat what I said in United Group Rail Services Ltd v Rail Corporation New South Wales (in a commercial context of a clause expressly incorporating good faith):99

[G]ood faith is not a concept foreign to the common law, the law merchant or businessmen and women. It has been an underlying concept in the law merchant for centuries. It is recognised as part of the law of performance of contracts in numerous sophisticated commercial jurisdictions. It has been recognised by this Court to be part of the law of performance of contracts.

[288] The usual content of the obligation of good faith that can be extracted from cases such as Renard Constructions (ME) Pty Ltd v Minister for Public Works,100 Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney,101 Burger King Corporation v Hungry Jack’s Pty Ltd,102 Alcatel Australia Ltd v Scarcella,103 and United Group Rail Services Ltd v Rail Corporation New South Wales104 is an obligation to act honestly and with a fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.

[289] None of these obligations requires the interests of a contracting party to be subordinated to those of the other. It is good faith or fair dealing between the parties by reference to the bargain and its terms that is called for, be they both commercial parties or business dealing with consumers. As Posner J said in Market Street Associates Ltd Partnership v Frey the contractual notion of good faith varies in what is required

97 Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584 at 649–51 [287]–[293]

(citations omitted). 98 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Aircraft

Systems International v Airservices Australia (1997) 76 FCR 151; Nick C Seddon, Rick A Bigwood and Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract (LexisNexis Butterworths, 10th ed, 2012) [10.41]–[10.47]. Cf Commonwealth Bank of Australia v Barker (2014) 253 169 at 195–6 [42], 214 [107].

99 (2009) 74 NSWLR 618 at 634 [58] (citations omitted). 100 (1992) 26 NSWLR 234. 101 (1993) 31 NSWLR 91. 102 (2001) 69 NSWLR 558. 103 (1998) 44 NSWLR 349. 104 (2009) 74 NSWLR 618.

http://www.lexisnexis.com/au/legal/search/runRemoteLink.do?A=0.8217421401148525&bct=A&service=citation&risb=21_T22875769306&langcountry=AU&linkInfo=F%23AU%23nswlr%23vol%2526%25sel1%251992%25page%25234%25year%251992%25sel2%2526%25decisiondate%251992%25

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for its satisfaction by reference to the nature of the contract.105 But the notion is rooted in the bargain and requires behaviour to support it, not undermine it, and not to take advantage of oversight, slips and the like in it. To do so is akin to theft, and if permitted by the law led to over-elaborate contracts, and defensive and mistrustful attitudes among contracting parties. At 595 Posner J said:106

The contractual duty of good faith is thus not some newfangled bit of welfare-state paternalism or … the sediment of an altruistic strain in contract law, and we are therefore not surprised to find the essentials of the modern doctrine well established in nineteenth century cases.

[290] The standard of fair dealing or reasonableness that is to be expected in any given case must recognise the nature of the contract or relationship, the different interests of the parties and the lack of necessity for parties to subordinate their own interests to those of the counterparty. That a normative standard is introduced by good faith is clear. It will, however, not call for the same acts from all contracting parties in all cases. The legal norm should not be confused with the factual question of its satisfaction. The contractual and factual context (including the nature of the contract or contextual relationship) is vital to understand what, in any case, is required to be done or not done to satisfy the normative standard.

[291] It is unnecessary to deal with the jurisprudence on the subject of good faith in other jurisdictions, beyond saying that the above expression of the matter is consistent with the content ascribed to the phrase “good faith“ in persuasive cases in influential jurisdictions in the United States: for example, refraining from acting with subterfuge and evasion;107 refraining from opportunistic conduct such as by taking advantage of a disadvantageous position of the other party who has performed first;108 refraining from hindering or preventing the occurrence of conditions of the party’s own duty or the performance of the other party’s duty;109 cooperating to achieve the contractual goals.110 The above are but a few examples.

[292] Good faith does not import an equitable notion of the fiduciary that is rooted in loyalty to another in the service of her or his interests.111 Rather, it is rooted in honest and reasonable fair dealing.112

105 (1991) 941 F 2d 588. 106 Market Street Associates Ltd Partnership v Frey (1991) 941 F 2d 588 at 595. 107 Daitch Crystal Dairies Inc v Neisloss 190 NYS 2d 737 (Appeal Div 1959); Harbor Insurance Co v

Continental Bank Corp 922 F.2d 357 (7th Cir 1990). 108 Industrial Representatives Inc v CP Clare Corp 74 F.3d 128 (7th Cir 1996). 109 See the discussion in Edward Allan Farnsworth, Farnsworth on Contracts (Wolters Kluwer, 3rd ed,

2004) Vol 2 § 7.17 p 362, § 8.6, 8.15. 110 Larson v Larson 636 NE 2d 1365 (Mass App Ct 1994); AMPAT/Midwest Inc v Illinois Tool Works Inc 896

F.2d 1035 (7th Cir 1990). See generally Edward Allan Farnsworth, Farnsworth on Contracts (Wolters Kluwer, 3rd ed, 2004) § 7.17–7.17b; Director General of Fair Trading v First National Bank Plc [2002] 1 AC 481 at 494, 500, 505.

111 Lionel Smith, “Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another“ (2014) 130 Law Quarterly Review 608.

112 Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA


[293] Trickery and sharp practice impede commerce by decreasing trust and increasing risk. Good faith and fair dealing promote commerce by supporting the central conception and basal foundation of commerce: a requisite degree of trust. Business people understand these things.

63 In this context, Woolworths submit that the use of the phrase “reasonably and in

good faith” is, in cl 2.2 of the Agreement for Lease, a “composite phrase”, which

involves the use of terms which are intertwined and complementary, and which

does not impose two separate standards of conduct. Even if this position were to be

accepted, it might nevertheless be thought that the elements of the expression—each

limb—would inform the other even if no more than one standard of conduct is to be

taken to be prescribed.113

64 As Priestley JA observed in Renard Constructions (ME) Pty Ltd v Minister for Public

Works:114

in ordinary English usage there has been constant association between the words fair and reasonable. Similarly, there is a close association of ideas between the terms unreasonableness, lack of good faith, and unconscionability. Although they may not be always co-extensive in their connotations, partly as a result of the varying senses in which each expression is used in different contexts, there can be no doubt that in many of their uses there is a great deal of overlap in their content …

65 Although, as Priestly JA observed, there is a great deal of overlap in the ordinary

meaning of words used in the composite expression “reasonably and in good faith”,

it does not follow, either from this observation or ordinary English usage, that the

ingredients of the composite as used in cl 2.2 of the Agreement for Lease lose the

force of their separate meanings. Thus, I am of the view that though these

ingredients may overlap in their meanings, this does not constrain their separate

operation in the context of these provisions.

66 When considering a statutory immunity for “anything necessarily or reasonably

done or omitted to be done in good faith”, the Victorian Court of Appeal in Victoria v

Horvath said that the expression should be read as a whole and that the word

268, [12]–[13].

113 See United Group Rail Services Limited v Rail Corporation New South Wales (2009) 74 NSWLR 618 at 625–6 [28]–[29].

114 (1992) 26 NSWLR 234 at 265.


“reasonably” cannot be construed as importing a totally objective test.115 That is, the

proper test to be applied was to have regard to all of the circumstances existing at

the time and, viewed from the perspective of the person claiming immunity, and ask

whether reasonable grounds existed for the course of action adopted.116 Moreover,

the Court of Appeal, in the process of reading this expression as a whole, did not

regard that approach as detracting from the position that each word used was to be

given meaning. Thus, the Court (Winneke P, Chernov and Vincent JJA) said:117

Section 123 accordingly contains a number of limiting expressions. The acts or omissions which would otherwise give rise to civil liability must be “necessarily or reasonably” performed or omitted “in good faith” and, of course, “in the course of duty”. There is a considerable overlap between these notions. Thus, for example, for the section to operate, all relevant acts or omissions had to be performed in the course of duty of the member concerned. Clearly, conduct not undertaken in good faith could not be regarded as being relevantly linked to the performance of the member’s duty. Further, an act or omission not in good faith could hardly be described as necessarily or reasonably done, or not done, in the course of duty. Moreover, whatever test of reasonability was adopted, it would have to be assessed in terms of the duty of the member in the circumstances in which that member was placed. The interdependence of the notions underlying these expressions, acknowledging that as a matter of statutory interpretation proper effect must be given to each of the words used, makes it apparent that the expression anything necessarily or reasonably done or omitted to be done in good faith in the exercise of his or her duty should be read as a whole.

In my view, there is no basis to confine this approach to statutory interpretation in

the context of the provisions of cl 2.2 of the Agreement for Lease.

67 Woolworths contend that the courts have “tended to equate or incorporate

reasonableness with or into fair dealing and good faith”, referring to the judgment of

Allsop P (as the Chief Justice then was) in Macquarie International Health Clinic Pty Ltd

v Sydney South West Area Health Service.118 The President did not, however, put the

position so starkly. Rather, Allsop P emphasised the importance of context in the

interpretation of provisions imposing good faith obligations and highlighted

115 (2002) 6 VR 326 at 345 [47]–[48]. Police Regulation Act 1958, s 123(1) provides: “A member of the force

or a police recruit is not personally liable for anything necessarily or reasonably done or omitted to be done in good faith in the course of his or her duty as a member of the force or police recruit.”

116 Victoria v Horvath (2002) 6 VR 326 at 345–6 [50]. 117 (2002) 6 VR 326 at 345 [47] (emphasis in original). 118 [2010] NSWCA 268, [15].


unresolved issues with respect to obligations of “reasonableness” and “good faith”,

in the following terms:119

[14] It is important to recognise that these obligations must be assessed and interpreted in the light of the bargain itself and its contractual terms. Those terms, however, must be assessed and interpreted in the light of the presence of the obligation of good faith, here pursuant to an express clause.

[15] Whilst the cases in this court have tended to equate or incorporate reasonableness with or into fair dealing and good faith, that is not without its controversy.120 Nevertheless, in these contracts, with express clauses of this width that have a necessary place in the working out and performance of the contracts, in some cases over many years, an objective element of reasonableness in fair dealing is appropriate, taking its place with honesty and fidelity to the bargain in the furtherance of the contractual objects and purposes of the parties, objectively ascertained.

As to the controversy, the discussion of issues and authorities to which reference is

made by Allsop P is particularly helpful. More specifically, discussing the notion of

“reasonable conduct”, Peden writes:121

Sir Anthony Mason stated that the obligation of good faith includes “compliance with standards of conduct which are reasonable having regard to the interests of the parties”. If by this were meant that contracts will be construed reasonably, considering the position of the parties, then there would be no argument that that is a correct statement of principle, and another example of an element of good faith in our law. Indeed, this is what is probably meant by Lord Wright in Hillas & Co Ltd v Arcos Ltd:122

[one should not ignore] the legal implication in contracts of what is reasonable, which runs throughout the whole of modern English law in relation to business contracts.

It is also true that some gaps in contracts will be filled with concepts of “reasonableness”, such as “reasonable time” and “reasonable price”, where no time or price is specified. However, this is not the same as requiring a standard of objectively “reasonable” exercise of rights, when the contract does not require such a standard.

If what is meant by “reasonable behaviour” is subjective reasonableness, then this description really goes no further than requiring “honesty”. However, it

119 [2010] NSWCA 268, [14], [15]. See also [9]. 120 Elisabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths, 2003) 159–99. See

especially 162–99. See also Edward Allan Farnsworth, Farnsworth on Contracts (Wolters Kluwer, 3rd ed, 2004) 400.

121 Elisabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths, 2003) 162–4, [7.5] (citations omitted).

122 [1932] All ER Rep 494 at 507.


seems that many are confusing an obligation of objectively “reasonable” behaviour with “good faith”, or imposing both obligations at once. In Burger King Corporation v Hungry Jack’s Pty Ltd,123 the NSW Court of Appeal repeatedly referred to terms of “good faith and reasonableness”124 and in fact stated:125

it is worth noting that the Australian cases make no distinction of substance between the implied term of reasonableness and that of good faith. As Priestley JA said in Renard Constructions (ME) Pty Ltd v Minister for Public Works:126 “The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith”. Priestley JA commented further at 265 that: “in ordinary English usage there has been constant association between the words fair and reasonable. Similarly, there is a close association of ideas between the terms unreasonableness, lack of good faith and unconscionability.”

With respect, to equate an obligation of reasonableness and one of good faith is misconceived. There is no doubt that our law, including contract law, is concerned about fairness and justice. There are arguments that there is no need for a distinct obligation of good faith, since the law is scattered with examples of legal principles designed to bring about fairness and justice,127 such as promissory estoppel and many construction rules such as contra proferentum. However, as more courts are incorporating good faith obligations into contracts, the meaning of “good faith” must be given a much more precise meaning than “fairness”, “justice” or even “reasonableness”. This distinction has been recognised in other areas, such as “satisfactory finance” clauses, where the High Court has construed such conditions as requiring honesty, but has not taken the step of also requiring reasonable behaviour.128

To introduce a requirement that parties exercise their rights “reasonably” would also require a reconsideration of the principle in White and Carter (Councils) Ltd v McGregor,129 which, to date, has never even been discussed in “good faith” cases. The decision is taken as authority for the propositions that a party does not have to mitigate loss if suing in debt rather than damages and that a party cannot be compelled to terminate a contract for repudiation by the other party, and the choice must not be exercised

123 (2001) 69 NSWLR 558. 124 See, eg, Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 at 568 [159], 569 [163]–

[164]. 125 Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 at 570 [169]–[170]. For other

examples of combining of “reasonableness” and “good faith”, see, eg, Elfic Ltd v Macks [2000] QSC 18, [109]; Commonwealth Bank of Australia v Renstel Nominees Pty Ltd [2001] VSC 167, [47]. In NSW v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503 at 530 [72], Einstein J hinted there might be a difference between reasonableness and good faith, but then cited Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558, which states there is no difference.

126 (1992) 26 NSWLR 234 at 263. 127 See, eg, Michael G Bridge, “Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?”

1984) 9 Canadian Business Law Journal 385, 409. 128 See Meehan v Jones (1982) 149 CLR 571. The distinction is recognised in the area of a mortgagee’s

power of sale as well. See Gerard Kelly, “The Mortgagee’s Duty of Sale: Retracing some Well Worn Paths” (1998) 6 Australian Property Law Journal 1.

129 [1962] AC 413.


reasonably. At present, the authority seems to be at odds with the introduction in other areas of a good faith obligation.

It is interesting that in Renard Constructions (ME) Pty Ltd v Minister for Public Works130 Priestley JA moved away from his earlier extra-judicial statement that “[r]easonableness and good faith are distinct concepts in contract law, each also being distinct from the ideas of unconscionability; each one may tend to overlap with either of the others.”131 As Stapleton has pointed out, a standard of objectively reasonable behaviour is far more onerous than a requirement of good faith behaviour.132 A party may have behaved in good faith, yet still have behaved unreasonably.133 Also, “provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied.”134 Furthermore, it is possible that a party has behaved reasonably, yet still an “unreasonable” outcome is achieved, viewed from the perspective of the other party.135

While “reasonable” or “fair” behaviour is imposed on corporations vis-à-vis consumers in a variety of contexts, it seems an extreme step for courts to impose an obligation of reasonableness on commercial parties contracting at arm’s length. It seems bizarre that courts are prepared to require commercial parties to behave reasonably towards each other, when they have not expressly included such a standard and the terms of the mutually agreed contract are very clear. As the English Court of Appeal has said when refusing to imply a term in law:136 “[t]he common law cannot … devise such a duty which the legislature has not thought fit to impose and it could not be just or reasonable for the court to impose it.”

68 It follows that the contention by Woolworths that the general comment made by the

New South Wales Court of Appeal in Burger King Corporation v Hungry Jack’s Pty Ltd,

(to which reference is made by Peden in the passage set out above) effectively

conflated obligations of “reasonableness” and “good faith” cannot be accepted at

face value.137 The general comment must be viewed in the context of that appeal and

the authorities more broadly. In my view, the position contended for is clearly not

established—on the basis of the authorities and commentary to which reference has

been made and in the further authorities relied upon by Woolworths in this respect.

130 (1992) 26 NSWLR 234. 131 L J Priestley, “Contract—The Burgeoning Maelstrom” (1988) 1 Journal of Contract Law 15, 28. 132 Jane Stapleton, “Good Faith in Private Law” (1999) 52 Current Legal Problems 1, 8. 133 Compare the many legislative definitions of good faith that will permit negligent behaviour, which

would arguably not be sanctioned by a standard of reasonableness. 134 Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, [37]. See also Lay v Alliswell

Pty Ltd (2002) V Conv R 54-651, [31]. 135 See, eg, Paragon Finance Plc v Staunton; Paragon Finance Plc v Nash [2002] 2 All ER 248 at 267, where a

mortgage company had a discretion to vary interest rates, and it was held the company had to behave reasonably, but this did not extend to requiring the company to set reasonable rates.

136 Reid v Rush Tompkins Group Plc [1990] 1 WLR 212 at 230. 137 (2001) 69 NSWLR 558.


It is to these further authorities relied upon to which I now turn.

69 Reliance is placed by Woolworths on the following part of the judgment of Warren

CJ in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL, particularly para

3:138

2. The development of the law relating to good faith has travelled an almost full circle. Following initial hesitation, even reluctance,139 by the courts to imply such a duty, there was a discernible preference to imply, instead, a duty of co-operation to secure performance of the contract.140 However, there has been clear recognition of the doctrine of good faith.141 That said, courts have, more often than not, decided these matters on other bases and thereby avoided the conceptual difficulty that can attend the concept of a duty of good faith. The courts seem, by and large, to have postulated “… if there is a duty of good faith …” then the duty must be owed mutually,142 and further, account should be taken of the commercial might and capacity of the affected contracting party. Thus, if both parties to the subject contract breached such duty, neither should be able to rely on an alleged breach of duty of good faith. In essence, the concept of “clean hands” comes into play.143

3. There has also been consideration of the capacity of a contractual party to look after itself and its own interests rather than turn to concepts of good faith for relief.144 These approaches, more aptly described as judicial reticence, regarding the application of the doctrine of good faith, may be construed as hesitation at the courts’ involvement in contractual performance. If a duty of good faith exists, it really means that there is a standard of contractual conduct that should be met. The difficulty is that the standard is nebulous. Therefore, the current reticence attending the application and recognition of a duty of good faith probably lies as much with the vagueness and imprecision inherent in defining commercial morality. The modern law of contract has developed on the premise of achieving certainty in commerce. If good faith is not readily capable of definition then that certainty is undermined. It might be that a duty of good faith is no more than a duty to act reasonably in performance and enforcement, a long established duty.145 Of course, some

138 [2005] VSCA 228, [2]–[4] (citations omitted). 139 See, eg, Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263–4.

See also, Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 96. 140 See, eg, Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at

607; CSS Investments Pty Ltd v Lopiron Pty Ltd (1987) 16 FCR 15; Adelaide Petroleum NL v Poseidon Ltd (1990) 98 ALR 431; Australian Mutual Provident Society v 400 St Kilda Road Pty Ltd [1990] VR 646.

141 See, eg, Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 at 191; Alcatel Australia v Scarcella (1998) 44 NSWLR 349 at 369; Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310.

142 See, eg, Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443, [91], [94]. 143 See, eg, Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443, [91], [94]. 144 See, eg, Playcorp Pty Ltd v Taiyo Kogyo Ltd [2003] VSC 108, [267]. 145 See Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288 at 297.


commentators have regarded the duty to act reasonably as properly subsumed within the duty of good faith.146

4. Ultimately, the interests of certainty in contractual activity should be interfered with only when the relationship between the parties is unbalanced and one party is at a substantial disadvantage, or is particularly vulnerable in the prevailing context. Where commercial leviathans are contractually engaged, it is difficult to see that a duty of good faith will arise, leaving aside duties that might arise in a fiduciary relationship. If one party to a contract is more shrewd, more cunning and out-manoeuvres the other contracting party who did not suffer a disadvantage and who was not vulnerable, it is difficult to see why the latter should have greater protection than that provided by the law of contract.

70 The further authorities relied upon by Woolworths take the analysis no further and

are, in my view, merely instances of the application of obligations of reasonableness

and good faith—accepting that the concepts overlap but without conflating or

absorbing one concept into the other as a mere incident of the broader concept.

Thus, in Expectation Pty Ltd v Pinnacle VRB Ltd, in the context of a duty of good faith

in negotiations, Steytler J (with whom McKechnie and Jenkins JJ agreed) quoted the

trial judge in that case as having said that a clause expressly stating that the parties

would negotiate in good faith had “placed a mutual obligation on the parties ‘to

negotiate in good faith, to do what was reasonably required in the circumstances

affecting the parties to enable the contingent elements of the contract comprised in

the letter agreement to be satisfied within the time framework provided, including

any extension agreed upon.’”147 In Sundararajah v Teachers Federation Health Ltd,

Foster J noted that “if a contract contains a requirement that the parties act in good

faith, they must act honestly, not capriciously, and reasonably.”148

71 In Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd, Finkelstein J noted

that—149

a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously. … [P]rovided the party exercising the power acts reasonably in all the circumstances, the

146 See Nick C Seddon and Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract (LexisNexis

Butterworths, 8th ed, 2002) 428 [10.48]. 147 Expectation Pty Ltd v Pinnacle VRB Ltd [2004] WASCA 261, [32]. See also [7]. 148 (2011) 283 ALR 720 at 731 [68]. 149 Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, [37].


duty to act fairly and in good faith will ordinarily be satisfied.

Similarly, in Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd, Bergin J (as

her Honour then was) found that the terms of a clause of an agreement requiring the

defendant to not act unreasonably when the plaintiff sought access to its land made

the additional implication of a duty to act reasonably and in good faith

“unwarranted” in respect of that clause.150 By contrast, her Honour found that for

the other clauses in question, which did not contain a requirement of reasonableness,

it would be “necessary for the defendant to act reasonably and in good faith for the

plaintiff to have the benefit of the Deed.”151

72 Thus the position in light of the authorities is that whilst there is considerable

overlap with respect to an obligation to act reasonably and an obligation to act in

good faith, the concepts are not co-extensive and are not to be conflated. Moreover,

the content of each depends, in particular cases, on the terms in which the parties

provide for such obligations, or either of them, and the circumstances in which they

are said to operate.

73 A further, more specific, question arises as to whether the obligation in cl 2.2(b) of

the Agreement for Lease is capable of being enforced, at least in the manner asserted

by NES.

74 In Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd, the obligation was to conclude a

contract for the sale and purchase of certain land “acting in good faith”.152 During

negotiations, the defendant (Cable Sands) proposed that the plaintiff (Strzelecki

Holdings) provide an indemnity and a $25 million, 20-year bank guarantee to

address the risk to the defendant of purchasing land that contained radioactive

tailings and potential claims that could be made against the defendant arising from

the use of the land. This was said to be unreasonable. Murphy JA noted to this

effect that:153

150 [2006] NSWSC 1235, [56]. See also [13] where the relevant clauses of the agreement are extracted. 151 Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd [2006] NSWSC 1235, [57]. 152 (2010) 41 WAR 318. 153 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 351–2 [108].


The issue raised for negotiation was, in my view, a matter for each party’s commercial judgment. Strzelecki Holdings’ submission in effect invites the court to resolve disputes arising in the negotiation process by determining “objectively” the permissible content of each party’s commercial self-interest in relation to proposed terms addressing the subject matter of the sale. That, in my view, does not accord with the intention of the parties to the [Memorandum of Understanding].

Further, Pullin JA said:154

Parties engaged in negotiations to conclude a contract owe each other no fiduciary obligations and they are not required to act in the interests of the other party. That being so, it is difficult to know what the third aspect means in this context unless the reference to reasonable standards of “conduct” is a reference to conduct which permits the negotiations to proceed. The [Memorandum of Understanding] clearly contemplates that they “deal” with each other by negotiating. This does not suggest that the content of an offer made in negotiations where the parties must deal with each other in good faith must pass some objective test of reasonableness to be assessed by the courts.

75 Woolworths submit that these passages highlight the difficulty in giving contractual

force to an obligation to act in good faith in circumstances where the substantive

right to which the obligation attaches is an agreement to negotiate key commercial

terms to the contract; that is, an “agreement to agree”. In the present case, the

Defendants contend that the obligation is to act “reasonably” and in good faith in

resolving the differences, not to negotiate a “reasonable” Landlord’s Works Costs

amount. Paraphrasing Murphy JA, the Defendants say that the Plaintiff invites the

Court to find that Woolworths breached their good faith obligations in the

negotiation process intended to agree key commercial terms, by determining

“objectively” the permissible content of each party’s commercial self-interest in

relation to the amount of the Landlord’s Works Costs, the amount of any

contribution to the Landlord’s Works Costs and the manner in which such a

contribution was to be paid.155

76 Moreover, Woolworths submit that the inability to determine the permissible

content of their commercial self-interest highlights a crucial gap in the contractual

framework. That is, it is said, notwithstanding the apparent intention of the parties

154 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 339 [62] (citations omitted). 155 See Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318 at 351–2 [108].


to negotiate such differences as there may have been between them as to—

(a) the amount of the Landlord’s Works Costs;

(b) the difference in cost to a Bunnings brief;

(c) the amount, if any, that Masters should contribute to that difference; or

(d) the manner in which any such contribution should be paid,

the Agreement for Lease is silent as to the way in which the parties were to resolve

such differences, except insofar as cl 2.2(b) requires them to act “reasonably and in

good faith”. As discussed in these reasons, I reject this characterisation of the effect

of the provisions of the Agreement for Lease and the Letter of Offer properly

construed. Moreover, the further authorities relied upon by the Defendants in

support of their characterisation and effect of the provisions of the Agreement for

Lease do not, in my view, support the Woolworths position and, rather, emphasise

the critical importance of the provisions of the agreement between the parties.156

77 Thus, as submitted by Woolworths, Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd

indicates that, in principle, an agreement to negotiate in good faith can be

enforceable, but whether this is the case depends upon the proper construction of the

agreement.157 Crucially, that case and cases that have followed it establish that a

court must look to the content of the obligation and ask, in effect, “What is it that the

parties are required to negotiate? Is the Court able to fill in the blanks?”158 It is only

if the Court can answer these questions that it can judge whether the parties’

conduct in endeavouring to negotiate those matters has been honest, reasonable et

cetera. That is, whether they have negotiated in good faith.

78 I do not see it as controversial or critical to the NES position that the present is not a

“process case”, such as discussed in Wellington City Council v Body Corporate 51702

156 See Defendants’ Closing Submissions (3 September 2015) [94]–[100]. 157 (1991) 24 NSWLR 1 at 26–7. 158 See AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd [2010] 2 Qd R 101; Jobern Pty Ltd v BreakFree Resorts (Vic)

Pty Ltd [2007] FCA 1066; United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618.


(Wellington)159 and applied in AMCI (IO) Pty Ltd v Aquila Steel Pty Ltd.160 Such cases

do, as Woolworths submit, typically concern dispute resolution clauses in which the

court is called upon to enforce a clause that specifies, with precision, how certain

negotiations are to be conducted, and concerns the steps required to attempt to

resolve the dispute rather than the outcome of the dispute. As might be said, cases

of this kind are about the journey, not the destination.161 A leading example of such

a case is United Group Rail Services Ltd v Rail Corporation New South Wales, in which a

dispute resolution clause contained an obligation to meet and undertake “genuine

and good faith negotiations”.162

79 Woolworths contend that not only does cl 2.2(b) provide no process to “resolve any

differences” in the key commercial terms, but it is clearly directed towards having

the parties agree those terms (that is, it is said, the destination). Moreover, it is

contended that cl 2.2(b) is an agreement to agree, not an agreement to follow a

particular process; as, it is said, there is no process to follow. Woolworths add that

this is not a case where an external arbitrator has been nominated to resolve the

outstanding differences.163 While, they say, this might have been the case under

para 13 of the Letter of Offer, by which Rider Hunt was to “verify the cost

difference”, this was not carried forward to cl 2.2 of the Agreement for Lease.

Indeed, NES expressly eschews such a role for Rider Hunt, pleading only that it was

an implied term of the Agreement for Lease that Rider Hunt was to verify the cost

difference “on behalf of Woolworths”. That is, Woolworths say, NES eschews Rider

Hunt having any role in binding NES. As is discussed in these reasons, this is, in my

view, a very narrow approach to the construction of cl 2.2 of the Agreement for

Lease and completely ignores the relevant factual matrix and any importance or

effect of the provisions of the Letter of Offer, particularly para 13.

159 [2002] 3 NZLR 486 at 495–6. 160 [2010] 2 Qd R 101. 161 Trevor Thomas, “The Enforceability of Agreements to Negotiate in Major Constructions Projects”

(2009) 25 Building and Construction Law Journal 94, 95. 162 (2009) 74 NSWLR 618. This is to be contrasted with Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd

(2010) 41 WAR 318, which concerned a Memorandum of Understanding containing an obligation to negotiate a contract for a sale of land “in good faith”. The court there did not consider whether such a term was enforceable—rather, it seems to have been assumed by the parties that it was.

163 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 27.


80 Further, the Defendants submit that this is not the type of case where the parties

have provided a readily ascertainable external standard, by which the Court may be

able to “add flesh to a provision which is otherwise unacceptably vague or uncertain

or apparently illusory”.164 More particularly, they submit that:165

98. …

(a) the [Landlord’s Works Costs] were not susceptible to a readily ascertainable external standard. That was the very subject of one of the matters in dispute;

(b) while the parties identified that the tenant was to pay the difference between the cost of a Masters store and the cost of “other major trade supply/restricted retail premises (full height precast brief)”, there is no external standard for the cost of “other major trade supply/restricted retail premises (full height precast brief)”. The evidence showed that NES used estimates from two separate builders (Troons and Vaughans) for the cost of constructing a Bunnings store for determining what it “required” Masters to contribute to the [Landlord’s Works Costs]. However, the evidence also showed that it is far from clear which Bunnings briefs were used by each of those builders or the assumptions and inputs used by each of them for making their estimates (although the position is clearer with Vaughans, as a result of the exercise conducted with RLB to scrutinise Vaughans’ estimates). No such exercise was ever conducted in respect of Troons’ estimates. This evidence will be considered in more detail below. For now, however, it is noted that there was no “readily ascertainable external standard” for even this part of the process;

(c) in any event, the use of the “Bunnings” brief to identify the difference in cost to the [Landlord’s Words Costs], says nothing about how the parties were to resolve that difference. The contract is, in effect, in this crucial respect a blank canvas (or a “blank space” in the words of Kirby P in Coal Cliff Collieries); and

(d) finally, there is no external standard of any type for how the parties were to resolve their differences as to the manner in which any contribution to the [Landlord’s Words Costs] was to paid.

99. In respect of the substantive commercial terms, this is a case about an incomplete contract, which the courts will not enforce. That is, the key commercial terms of the amount of the [Landlord’s Words Costs], the amount (if any) that the tenant would contribute to those costs, and the manner in which such costs would be paid, had not been

164 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 27. 165 Defendants’ Closing Submissions (3 September 2015) [98]–[100] (emphasis in original and citations

omitted).


agreed. The [Agreement for Lease] was incomplete pending further agreement between the parties, which never eventuated.

100. The fact that some progress was made in bridging the gap between the parties does not indicate that a contractual requirement to negotiate the remaining matters is capable of enforcement. It is, at best, evidence of the good faith of the negotiations that were occurring, unguided as they were by objective standards or commercial yardsticks.

81 As discussed in these reasons, the position contended for by Woolworths with

respect to the enforceability of the provisions of cl 2.2 of the Agreement for Lease to

which reference has been made represents a very narrow and, in my view, erroneous

approach to the construction of these provisions. Among other things, it ignores the

relevant factual matrix to these provisions and any significance or effect of the

provisions of the Letter of Offer, particularly para 13.

82 As appears from the preceding discussion, the duty to “act reasonably” imposes on a

party an obligation to cooperate in achieving the contractual objects (loyalty to the

promise itself); to comply with honest standards of conduct; and to comply with

standards of conduct which are reasonable having regard to the interests of the

parties.166 A duty to act reasonably, which is often classified as falling within the

obligation to act in good faith,167 so as to achieve a contractual goal has been held to

be “necessarily conditioned by what is reasonable in the circumstances”.168 The

circumstances must include the nature of the commitment that has been made and

the circumstances in which it was given. In my view, it is correct to say, as NES

contends, that cl 2.2(b) of the Agreement for Lease is, in all the circumstances, not a

commitment to negotiate, free from any constraints. It is, in the circumstances and

having regard to the provisions of the Letter of Offer, a commitment to act

reasonably and in good faith in an attempt to resolve differences in relation to a cost

estimate. The object of this process and of the clause itself was to enable the parties

to quantify the difference in cost as between the development of the Strathdale site

as a Bunnings store and the development of that site as a Masters store, costs which

166 Sir Anthony Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 Law

Quarterly Review 66. 167 See Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263. 168 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 659 [41].

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Woolworths had already committed to pay. In my view, it is clear that the content of

the duties to act reasonably and to act in good faith must be informed by these

circumstances. As NES observes, by way of example, while it may be reasonable for

a party not to disclose the basis of its position in a mediation or negotiation, where

the object is merely to negotiate in one’s own self-interest, refusing to provide the

information necessary to identify differences between the parties, where the object of

the duty is to resolve such differences, such conduct will be unreasonable and,

depending on the precise circumstances, probably also a failure to act in good faith.

83 As is discussed further in these reasons, NES contends that Woolworths took into

account extraneous matters that were not contemplated by the Agreement for Lease,

including Woolworths’ undisclosed budget, their desire to pursue an alternative site

and perceptions about NES’s financial position and opposition from the Council or

residents, and that Woolworths purported to perform their obligations and exercise

the power to terminate the Agreement for Lease without the requisite contractual

object in mind. In this respect, NES submits that the requisite contractual object was

solely the identification and resolution of differences in the calculation of the

Landlord’s Works Costs and the Tenant’s contribution to those costs, which

contribution Woolworths had already committed to make.

84 NES submits that by acting with other extraneous objects in mind, such as the

matters to which reference has been made, Woolworths did not act faithfully to the

contractual object or in good faith. Similarly, NES submits that, having been

diverted by the object of bringing the construction costs for the Strathdale site within

their undisclosed budget, Woolworths failed to take all reasonable steps to identify

and resolve any differences they may have had in relation to NES’s calculation of the

Landlord’s Works Costs and the Masters contribution. NES contends that

reasonable steps in this context are the steps that a reasonable person only acting

with the contractual object in mind would have taken, including engaging with NES,

inviting it to open book meetings, sharing information and accurately trying to

resolve any differences, whether or not the resulting number exceeded Woolworths’


approved budget.

85 NES submits that, having failed to act reasonably and in good faith to identify and

resolve any differences with NES’s estimate of the Landlord’s Works Costs and the

Masters contribution, Woolworths then terminated the Agreement for Lease for

reasons that were not permitted under that agreement. Moreover, NES contends

that on the basis of the evidence as to the matters raised in its submissions, to which

reference has been made in the preceding paragraphs of these reasons, there is every

reason to believe that there was no “genuine” disagreement between the parties as to

the calculation of the Landlord’s Works Costs. Moreover, it is said that the Rider

Hunt estimate at the end of the open book review process exceeded the contribution

sought by NES on 1 April 2010. Specifically, NES submits that if there were such a

difference or differences, Mr Macmillan admitted that these were never identified by

Woolworths or communicated to NES in any meaningful way.169 This, NES says,

was a prerequisite to negotiating or resolving any such differences.

86 More specifically, NES submits that insofar as it is necessary to decide why

Woolworths did not act reasonably, or in good faith to identify or resolve any such

differences, the Court should find that Mr Macmillan was constrained from

negotiating and agreeing the Landlord’s Works Costs with NES until such a time as

those costs could be brought within Woolworths’ undisclosed budget. Mr

Champion admitted Mr Macmillan had no authority to negotiate and agree a sum

outside the approved budget.170 In relation to the decision by Woolworths to

terminate the Agreement for Lease, NES contends that the documentary evidence

clearly establishes that Woolworths had decided to pursue the alternative Hume &

Iser store well before there had been any negotiation or disagreement between the

parties as to the calculation of the Landlord’s Works Costs171 and that Woolworths

took into account various other extraneous factors which were not permitted under

the Agreement for Lease, including perceived opposition by the Council or residents

169 Transcript 853–4, 961. 170 Transcript 1084. 171 Transcript 1148.


and a mistaken belief that NES may have had funding issues.172

87 Concluding these series of submissions, NES contends that Woolworths’ failure to

give Mr Macmillan the authority to do that which was required under the

Agreement for Lease, namely to negotiate and agree on the calculation of the

Landlord’s Works Costs, even if it exceeded Woolworths’ undisclosed budget, and

having committed itself to pursuing an alternative site, the Court should find that

Woolworths’ conduct in “negotiating” the Landlord’s Works Costs up to and

including the meeting on 22 April 2010 was in bad faith. It is said that it was in bad

faith because it was not done faithfully to the sole contractual object and in defiance

of the obligations imposed by the Agreement for Lease. It is to these issues that I

now turn in the context of the evidence. For the reasons which follow I am of the

view that the position put by NES in these series of submissions is made out on the

evidence.

Factual issues

Letter of Offer

88 The Strathdale site was initially brought to the attention of Woolworths by Mr Blake

in or around May 2009 as a result of enquiries by Woolworths whether NES had a

parcel of land that was suitable for the development of an Oxygen (Masters) store in

Bendigo.173 As discussed in the preceding reasons, the purpose of the Letter of Offer

was to record the agreement to construct and lease a Masters store at the Strathdale

site. Having regard to the terms of the Letter of Offer and the Agreement for Lease,

little turns on the circumstances in which the site was identified and the detail of

meetings in the early stages between Mr Blake, then on behalf of the “Maxi Foods

Group”, and Mr Macmillan on behalf of Woolworths. In any event, it is clear that, as

required by the Letter of Offer, the Property Committee, which had delegated

authority from the Woolworths Board of Directors, approved entry into the Letter of

172 Transcript 899, 1177. 173 Court Book 982.


Offer on 4 August 2009.174 As the evidence indicates, considerable effort was put

into the submission that went to the Property Committee in support of the site.175 At

this stage, the submission contemplated a capital contribution of $1.7 million to be

incurred by Woolworths in respect of the difference between the generic Bunnings

and Masters stores.176

Costing of generic design briefs

89 After the execution of the Letter of Offer, Mr Blake provided Woolworths with

information to assist in obtaining Board approval, drafting of an agreement for lease

was commenced, negotiations were conducted as to its terms and Woolworths

continued to develop the design brief for the new Masters stores. By about July

2009, Design Kit Rev A for a generic Masters store of 13,500 square metres had been

prepared. By early September 2009, Rider Hunt estimated the cost of constructing a

13,362 square metre store based on this brief to be $15.4 million,177 and the difference

in cost to build a Bunnings store was estimated to be approximately $3,266,000.178

Woolworths, however, considered that the cost was far too high and that Design Kit

Rev A would need to be re-engineered to reduce the costs.179

90 As the revised design brief had not been completed by late September 2009,

Woolworths suggested that Mr Blake have his builders prepare a brief for the cost of

constructing a Masters store on the Strathdale site. In response, on 9 October 2009,

Mr Blake provided, by email, a proposed brief prepared by Troons. In this Troons

brief, it was stated that the rate to construct a 10,535 square metre “Woolworths”

warehouse was $780 per square metre plus GST, excluding head works, external

boundary works and full height precast concrete panels.180 As to the latter, Mr Blake

quoted a price of $8,467,300 plus GST as the price including the full height precast

174 Court Book 1205–9. 175 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [16]–[25]; Outline of Brendan Edward

Blake (6 March 2015) [75]–[76], [78]–[79]. 176 Court Book 4490. 177 Court Book 1358–9. 178 Court Book 1679, 1606. 179 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [51]–[52]; Further Outline of Evidence

of Ewen Kenneth McDonald in Reply (31 March 2015) [3]–[5]. 180 Court Book 1845.


concrete panels. This price was, however, as Mr Blake’s email makes clear, actually

the lowest price for a store with full height precast concrete panels. The additional

cost of the full height precast concrete panels was expressed as a range, which

produced a rate of between $804 per square metre and $808.50 per square metre.

These prices represented Troons’ estimate of the cost of building a 10,535 square

metre “Bunnings” warehouse. The Woolworths brief was not yet available at this

time. Subsequently, Troons told Mr Blake that it would not be involved in

constructing a store for Woolworths due to its commercial ties to Bunnings.181

91 By mid-December 2009, Design Kit Rev B had been prepared and costed,182 and an

estimate has been prepared by Rider Hunt of the cost difference between the

construction of a Masters store with a total enclosed area of 13,465 square metres and

a Bunnings “S9” store (May 2008 Brief Rev 2) with a total enclosed area of 14,072

square metres.183 The Rider Hunt estimate of the cost of a generic Masters store with

a total enclosed area of 13,465 square metres was $12,104,254, and their estimate of

the cost difference to the comparable Bunnings store was $1,176,562.184 This Rider

Hunt costing translated at a rate of $899 per square metre. Mr Blake was provided

with access to the Design Kit Rev B on 13 January 2010,185 and on 29 January 2010

arrangements were made for Mr Blake’s new builder, Vaughan Constructions Pty

Ltd (“Vaughan Constructions”), to be given access to the design kit to enable it to

prepare an estimate of the cost of building the store.186

92 Rider Hunt provided Woolworths with a further estimate for the cost of a generic

Masters store on 3 February 2010. This estimate was with respect to a store of 13,676

square metres and was for a sum of $12 million; which translates to a rate of $877 per

square metre.187 This was the final cost plan prepared by Rider Hunt for a generic

181 Outline of Brendan Edward Blake (6 March 2015) [143]. 182 By Slattery Pty Ltd and Rider Hunt: Court Book 2194, 2295–6. 183 Court Book 2417. 184 This estimate was for a 13,465 square metre store, which is larger than the 10,923 square metre store at

the Strathdale site. It was on this basis that Woolworths’ expectations were that the Strathdale store would cost roughly $1 million: Transcript 692.

185 Court Book 2648, 4005, 4008. 186 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [60]–[63]. 187 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [9].


Masters store of 13,500 square metres based on Design Brief Rev B, and was the

generic cost plan that, thereafter, was referred back to by Rider Hunt, although the

target cost plan for individual sites would vary from site to site.188

Agreement for Lease

93 As discussed previously, the formal Agreement for Lease was executed on

24 February 2010. A number of the conditions provided for in paragraph 21 of the

Letter of Offer were not satisfied at the time the Agreement for Lease was executed.

An example cited by Woolworths in this respect is that the Maxi Foods Group had

not gained control of all the land on the site, and development plans and

programming had not been finalised. As indicated previously, it is also clear that at

this stage, development plans, programming, conditions precedent regarding

development, scope of works and finishes to Woolworths’ satisfaction had not

occurred as the design brief for the Masters store at the Strathdale site, and

seemingly for other sites, had not been fully developed and finalised. In any event,

the Agreement for Lease was itself finalised and executed.

Events preceding negotiation of Landlord’s Works Costs

94 It is clear that by 1 April 2010, when Rider Hunt reported back to Woolworths, the

amount of the Landlord’s Works Costs then-estimated materially exceeded the

budget that had been approved by the Property Committee on behalf of the

Woolworths Board. As at that date, Rider Hunt’s estimate of Masters’ contribution

stood at $3,247,195,189 whereas the approved budget had been fixed at $1.7 million.190

Mr Champion’s evidence was that Mr Macmillan, who was negotiating with NES on

behalf of Woolworths, was not authorised to agree a Landlord’s Works Costs

amount that exceeded the preapproved budget.191 Mr Champion’s evidence was

that Mr Macmillan was authorised to terminate the Agreement for Lease if the store

could not be constructed for a contribution amount that was within the approved

188 Transcript 1288. 189 Court Book 3293–4. 190 Court Book 4490. 191 Transcript 1148.


budget.192 As discussed further in these reasons, Woolworths was not free to

terminate the Agreement for Lease on any such basis.

95 On 23 November 2009, Mr Macmillan attended a meeting at the offices of the

Council. Also in attendance was Mr John Panozzo of the Department of Innovation,

Industry and Regional Development, who was assisting Woolworths with planning

amendments for its key Oxygen (Masters) stores, including Bendigo.193 At that

meeting, representatives of the Council said that the Council had a number of

concerns with the proposal to construct a Masters store at the Strathdale site,

including that the site was close to a surrounding residential development and the

Council intended to rezone the land residential. The Council representatives said

that the Council was, however, supportive of a development elsewhere in

Bendigo.194 The following day, the Council sent a letter to Mr Panozzo setting out its

position.195 In that letter, the Council said that it was “keen to assist in getting this

development in Bendigo” and recommended finding a site in the northern parts of

Bendigo, along the Midland Highway. The Council said it had identified a number

of potential sites that it considered to be viable alternatives.196 Following this

meeting, Woolworths formed the view that the Council was not supportive of the

development of the Strathdale site as an Oxygen (Masters) site.197

96 On 19 February 2010, Mr Blake, on behalf of Kennington Village Pty Ltd, asked

Woolworths if it would provide interim funding for a shopping centre development

in Bendigo, which shopping centre was to be constructed by NES and leased to

Woolworths (“the Kennington Village development”). Interim funding was, he said,

required to enable planning amendments requested by Woolworths to be obtained

and then funding to be obtained from Bendigo Bank.198 Despite Woolworths

192 Transcript 1148. 193 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [39]. 194 Court Book 2105–6. 195 Court Book 2105. 196 Court Book 2106. 197 Court Book 3422. Cf the interpretation of this email by Woolworths with respect to termination

which is at odds with the words, content and structure of this email (see Defendants’ Closing Submissions (3 September 2015) [182].

198 Outline of Brendan Edward Blake (6 March 2015) [372].


agreeing to provide the interim funding and entering into a Facility Agreement with

Kennington Village Pty Ltd to advance up to $6,760,165 to Kennington Village Pty

Ltd, with an option to purchase the Kennington Village site,199 the Kennington

Village development ultimately did not proceed because Kennington Village Pty Ltd

was unable to obtain the necessary planning approvals.

97 As a result, Kennington Village Pty Ltd defaulted on paying out or refinancing its

loan from Woolworths and Woolworths exercised its option to purchase the

Kennington Village site. While this default arose as a result of an inability to obtain

planning approvals, and not as a result of any financial difficulties facing

Kennington Village Pty Ltd, Woolworths nevertheless appears to have erroneously

formed the opinion that NES “had funding issues”.200 The evidence of

Mr Macmillan who admitted forming this opinion was that he had no personal

knowledge of, and had not investigated, the Kennington Village Pty Ltd default201 or

NES’s financial position. Mr Macmillan’s opinion, that NES had funding issues, was

never communicated to NES. Consequently, and for the reasons set out below with

respect to this issue,202 Mr Macmillan’s evidence to the effect that Mr Blake had

advised him that NES had funding issues in relation to the Bendigo development

must be rejected.203 Mr Blake’s evidence that he had made no such statement, and

that funding for the Bendigo development had not been sought because such

funding was premature until planning approvals had been obtained, is to be

preferred, particularly having regard to the particular circumstances affecting the

Kennington Village Development.204

98 From late 2008 or early 2009, but prior to Danks having been acquired by

Woolworths, Danks had embarked upon an expansion strategy (“Project Lion”) that

included a possible alliance with Natbuild, or acquisition of Mitre 10 as well as other

199 Court Book 4615. 200 Court Book 3138. 201 Transcript 648. 202 See below [230]–[235]. 203 Transcript 661–2. 204 Transcript 210–1.


independent home hardware stores.205 Danks’ expansion strategy was constrained

by a lack of capital.206

99 Nevertheless, as part of this expansion strategy, Danks had identified the Hume &

Iser store in Bendigo as a key acquisition target. The Hume & Iser store was the

twelfth largest independent hardware retailer in Australia with annual sales of

around $27.9 million.207 Woolworths also identified the Hume & Iser store as one of

30 priority independent sites for acquisition during its due diligence on Mitre 10,

Danks and others.208

100 By February 2010, before the Vaughan Constructions estimate had been obtained,

but after the binding Letter of Offer had been executed and approval had been

obtained from the Property Committee, Woolworths began incorporating the Danks

business into its own.209 This included incorporating Danks’ expansion strategy.210

This strategy, which included the acquisition of the Bendigo Hume & Iser store, was

inconsistent with the Property Committee decision that had been made to pursue

only one store in Bendigo and to approve the Bendigo site.211

101 As a result of the acquisition of Danks, Woolworths’ Home Improvement Strategy,212

not previously referred to, expanded to include medium box retail stores and trade-

focused retail.213 The strategy expressly contemplated Woolworths protecting and

growing Danks’ key Home Timber & Hardware store customer base214 and avoiding

or minimising competition (described as a “clash of trade” or “cannibalisation”)

between Oxygen and trade focussed retail stores.215 Where competition was

unavoidable, for example if Woolworths was to acquire a large trade player such as

Dahlsens, various strategies were identified by Woolworths to minimise

205 Court Book 4331. 206 Court Book 4508. 207 Court Book 930, 4394. 208 Court Book 4448. 209 Transcript 1108. 210 Transcript 1107. 211 Court Book 1231. 212 Transcript 1109. 213 Court Book 4715. 214 Court Book 4722, 4724, 4738. 215 Court Book 4724.


competition. These strategies ranged from offering incentives to the key Home

Timber & Hardware stores to maintain their relationship with Danks, to cutting back

the trade offering of Oxygen stores in metropolitan areas where there were trade

focussed retail stores, to sharing advertising costs, to choosing between having an

Oxygen store or a trade focussed store in a particular catchment.216 Where incentives

were offered, the level of incentives offered by Woolworths to Home Timber &

Hardware stores the subject of competition from Oxygen stores would depend on

the size, strategic importance and circumstances of the affected Home Timber &

Hardware store.217

102 Woolworths placed particular importance in its Home Improvement Strategy on

protecting Danks’ key Home Timber & Hardware customers in regional or country

areas who were being targeted by competitors.218 An exception was made to the

Woolworths strategy of not acquiring any small box retail operations in Oxygen

(Masters) catchment areas, where it was desirable to do so as “a defensive play to

protect a key Home [Timber & Hardware] member being targeted by a

competitor”.219 Where a key Home Timber & Hardware store fell within a potential

Oxygen catchment area in a regional or country area—as was the case in Bendigo—

the strategy was to “jointly agree whether the market was suitable for an Oxygen or

trade focussed retail store and proceed accordingly”.220 That is, to choose whether

the trade focussed store or the Oxygen (Masters) store was to be supported.

103 By late February 2010, discussions had taken place between Mr Stephen Iser, the

director of Hume & Iser, and Mr Graeme Danks of Danks Holdings. During those

discussions, Mr Iser advised Mr Danks that he had previously had discussions with

Bunnings, had signed a confidentiality agreement with Bunnings and had shared the

Hume & Iser financials with Bunnings.221

216 Court Book 4724. 217 Court Book 4724. 218 Court Book 4722, 4724, 4738, 4743. 219 Court Book 4724. 220 Court Book 4724. 221 Court Book 3421.


104 It appears that the acquisition of Hume & Iser by Bunnings would have presented a

significant potential problem for Woolworths and Danks in that the Strathdale site

was within 10 kilometres of the Hume & Iser store in Bendigo. As a result of the

undertakings given to the ACCC, the Hume & Iser store would be guaranteed access

to Danks products at the same price as other independent stores and would be free

to terminate its agreement with Danks and could terminate that agreement at any

time, free of consequence, in order to compete with the Oxygen (Masters) store. As

Masters was one of Danks’ largest customers, losing the Hume & Iser store—which

had nearly $30 million in annual sales—to Bunnings would have significantly

undermined Woolworths’ strategy of strong competition with Bunnings in key areas

like Bendigo and depriving Wesfarmers of cash-flow from Bunnings, at least in the

Bendigo region.

105 On 9 March 2010, well before the Rider Hunt open book review had been completed,

Mr Danks along with Mr O’Brien from Woolworths222 and others met with Mr Iser to

discuss the potential purchase of the Hume & Iser store by Danks.223 Shortly after

this meeting, but still before the open book review had been completed, the status of

the Strathdale site following the Woolworths Property Committee meeting that day

had changed to “Alternative site being pursued. Check legal position in relation to

negotiation on site”.224 Woolworths offered no explanation as to why Mr O’Brien

was not called to give evidence in this proceeding about the substance of the critical

9 March 2010 meeting, despite the fact that this meeting appears to be the origin of

the decision to pursue the alternative Hume & Iser store.

106 On 12 March 2010, Mr Danks emailed Mr David Hunt of Woolworths Shared

Services. In this email, Mr Danks said that a person from Mitre 10 had been

spreading a rumour amongst Danks’ retail customers—that is, independent

hardware stores in Bendigo including the Home Timber & Hardware store at the

Hume & Iser site—that Woolworths had purchased a site in Bendigo to construct an

222 Court Book 3085. 223 Court Book 3421. 224 Court Book 3138, 3134, 3141–2.


Oxygen store. Mr Danks said to Mr Hunt that the site in question could have been

purchased by another division of Woolworths and that he would very much like to

“squash the rumour and put the b…h from Mitre 10 back in her box”.225

107 On 16 March 2010, Mr Hunt forwarded the email from Mr Danks to Mr Macmillan,

along with the question “Do you know if supermarkets or anyone are looking at this

site?”226 In actual fact, Woolworths was not pursuing that site for an Oxygen

(Masters) store in Bendigo.

108 No correspondence has been discovered by Woolworths between Mr Macmillan and

Mr Danks for the period from 17 March 2010 to 23 April 2010. It is clear, however,

from the email correspondence on 24 April 2010, which was still prior to the

termination of the Agreement for Lease by Woolworths, that there had been

telephone communications between Mr Danks and Mr Macmillan and that

Woolworths was willing to walk away from the Bendigo site as “the preference is to

progress the Hume & Iser site as an Oxygen site as this site has a better location

and … would be supported by Council”.227

Discussions regarding Masters’ contribution to Landlord’s Works Costs

109 NES obtained an estimate to construct a 10,535 square metre hardware store to

Bunnings specifications on 9 October 2009.228 The estimate provided to NES was

$780 per square metre plus GST which was based on a 2,100 millimetre concrete

dado wall with metal clad elevations, but subject to some exclusions. The estimate

of $8,467,300 plus GST included a full height precast building.229 This estimate was

obtained from Troons, a company whose experience included constructing 42

Bunnings stores around Australia. A second estimate to construct a store to the

Bunnings specifications was obtained from Vaughan Constructions in February

225 Court Book 4675. 226 Court Book 4675. 227 Court Book 3421. Cf the interpretation of this email by Woolworths with respect to termination

which is at odds with the words, content and structure of this email: Defendants’ Closing Submissions (3 September 2015) [182].



2010. This Vaughan Constructions estimate was $785 per square metre; an estimate

which was within $5 per square metre of the Troons estimate obtained on 9 October

2009.230 On 16 February 2010, NES adjusted the Troons estimate to reflect a store

area of 10,738 square metres, which resulted in an estimate to construct an

equivalent Bunnings store on the Strathdale site of $8,375,640 plus GST for a full

height precast building.231

110 The final version for the design plans and specifications for the Bendigo Masters

Store was completed by Woolworths in January 2010.232 The completion of this final

version of the design plans and specifications enabled further estimates to be

prepared. Thus, on 1 March 2010, Vaughan Constructions provided NES with a

quote to construct a Masters store at the Strathdale site in Bendigo based on

Woolworths’ final specifications. That quote was $12,348,061 plus GST for a 10,923

square metre store; being the 10,738 square metre store contracted for plus a 185

square metre first floor equipment area.233 Mr Macmillan’s evidence was that he did,

on 1 March 2010, receive an email from Mr Blake attaching this Vaughan

Constructions quote.234

111 NES, in its submissions, points to the significance of this, indeed any estimate, in the

present context by Vaughan Constructions having regard to its success in winning

the construction contracts for the first six Masters stores in Victoria, which were

located at Braybrook, Burnside, Coolaroo, South Morang, Dandenong and

Keysborough. Mr McDonald of Rider Hunt gave evidence that Rider Hunt was the

quantity surveyor or cost consultant in respect of various Masters stores which were

built by Vaughan Constructions and that all negotiations with Vaughan

Constructions in respect of those stores were satisfactorily concluded.235 Indeed,

Mr McDonald described Vaughan Constructions as a leading commercial builder

230 Court Book 3016. 231 Court Book 211. 232 The specifications consisted of Design Brief Revision B (Court Book 1982), Construction Brief Revision

D (Court Book 2112) and Site Plan SK04 (Court Book 1773). 233 Court Book 3001, 3020. 234 Court Book 3017, 3018–34, 4012. 235 Transcript 1273–4.


with which he got on well.236 Vaughan Constructions was, however, not called by

any party to these proceedings. Mr Blake’s evidence was that Vaughan

Constructions was unwilling to give evidence against Woolworths in the

proceeding.237 In this respect, NES submits that this is perhaps not surprising, given

the relationship between Woolworths and Vaughan Constructions, the latter having

obtained approximately $97 million of work from Woolworths.

112 From the perspective of Woolworths at about this time, and prior to receiving any

information from NES, they had received estimates from Rider Hunt for the

construction of a generic Masters store constructed to Design Brief Rev B, being for:

(a) a 13,465 square metre store that would cost $12.1 million, or $899 per square

metre;238 and

(b) a 13,676 square metre store that would cost $12 million, or $877 per square

metre.239

113 On 2 March 2010, Mr Blake received an email from Mr Jordan Grigg of Vaughan

Constructions in which the latter raised with Mr Blake queries about the inclusion of

the site works costs in the Vaughan Constructions estimate for the Strathdale site,

pointing out that this made that estimate appear “expensive” compared to a quote

they had provided to Woolworths for another store. Mr Grigg included an

attachment to his email which he urged Mr Blake to consider, so that he could

understand the difference in the sites works costs made to the estimates. This email

is, of course, indicative of communications between Mr Blake and Vaughan

Constructions, which is hardly surprising in the circumstances of this matter, but

does not, in my view, provide evidence of any agency relationship as between

Vaughan Constructions and NES, and nor does it cast any doubt on the bona fides of

the estimate of construction costs and, hence, Landlord’s Works Costs on the part of

236 Transcript 1271, 1273. 237 Transcript 154. 238 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [7]; Court Book 2194, 2296. 239 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [9]; Court Book 2759, 2844.


NES in spite of inferences to the contrary which Woolworths seek to draw.240

114 In any event, on 3 March 2010, NES provided to Mr Macmillan its estimate of

Landlord’s Works Costs, in the following terms (omitting formal parts of the letter

from Mr Blake to Mr Macmillan):241

Strathdale Home Improvement Centre Landlord’s Works Costs Estimate

We write regarding our recently provided Vaughan Constructions Pty Ltd cost estimate for the construction development of the Strathdale Home Improvement Centre and to complete our obligations under Sec. 2.2(a)(i)–(iii) of the Strathdale (Bendigo) Agreement for Lease and Lease.

We have determined and provided the open book costing of the Landlord’s Works Costs.

We confirm the construction estimate is based on the plan SK04 as attached to the Agreement for Lease. The cost estimate is:

$12,348.061.000 plus GST.

Under the provision of the Woolworths Letter of Offer of 2 June 2009 (item 13) we confirm the construction estimate for an alternative trade supply development for this site is:

$8,375,640.00 plus GST.

Accordingly we confirm the lump sum contribution the tenant is required to contribute to the Landlord’s Works Costs is:

$3,972,421.00 plus GST.

Please confirm your acceptance of the Tenant’s works costs for this development.

We look forward to receiving your response.

115 It might have been thought that, having regard to the estimates which NES had

obtained from two very experienced builders of Bunnings stores who had also been

associated with and undertaken significant work for Woolworths, this estimate and

other estimates provided by NES would have been relatively uncontroversial from

the perspective of Woolworths, and to the extent that there was any issue or

disagreement, that these matters would have been worked through quite

240 See, eg, Defendants’ Closing Submissions (3 September 2015) [132]–[133]. See also below [195]–[207]. 241 Court Book 3077 (emphasis in original).


expeditiously and constructively. At least this is, in effect, the position advanced by

NES.242

116 In light of the construction adopted by Woolworths with respect to the operation of

cl 2.2 of the Agreement for Lease, they characterise the estimate of construction costs

and, consequently, Landlord’s Works Costs provided on 3 March 2010 as a

“determination” for the purposes of those provisions, particularly cl 2.2(a)(i) of those

provisions. Having characterised the 3 March 2010 letter in this way, Woolworths

contend that there were “inconsistencies” with the “determination” provided by

NES, a contention in this respect which appears to embrace dealings between the

parties from 3 March 2010 up until the meeting on 22 April 2010, which is discussed

in further detail in the reasons which follow.243 I turn now to consider events from 3

March 2010 until the 22 April 2010 meeting, both from the perspective and

characterisation placed on those events by Woolworths, and also the characterisation

put on the same or related events by NES, which characterises them as variously a

process of revision and explanation of estimates and events as part of the “open

book” process contemplated by cl 2.2 of the Agreement for Lease.

117 The first criticism made by Woolworths in relation to the estimates provided by NES

on 3 March 2010 is that the source of the estimate for alternative trade supply

development was not stated, but was based upon an estimate provided by Troons,

as set out in the email to Mr Macmillan dated 1 March 2010.244 Additionally, it is

said that there were two further inconsistencies with the “determination” provided

by NES:

(a) the rate of $780 per square metre used by NES was the rate that Troons had

estimated for a building without full height precast panels,245 whereas the

Masters design brief required such panels.246 As noted above,247 Troons had

242 See, eg, Plaintiff’s Closing Submissions (3 September 2015) [60]. 243 See below [158]–[165]. 244 Court Book 3017. 245 Court Book 1844; Transcript 255. 246 Transcript 255. 247 See above [90].


told Mr Blake that such panels would add $250,000 to $300,000 to the price,

meaning that the rate with the panels was actually between $804 per squre

metre and $808.50 per square metre.248 By using the Troons rate that did not

include full height precast panels, NES undervalued the price for the

comparable store and thereby increased the contribution sought from Masters

by that amount;249 and

(b) NES used a store size of 10,738 square metres for the comparator store (as

provided for by the Agreement for Lease), but the Masters store designed by

Vaughan Constructions had a total enclosed area of 10,923 square metres.250

This was not an “apples to apples” comparison and, again, had the effect of

inflating the amount of the contribution sought by NES. In order to compare

like with like, either the rate for the Masters store would have to be calculated

on the size stipulated by the Agreement for Lease, or the comparator store

would have to be calculated on the Vaughan Constructions-designed size.251

Additionally, Mr Macmillan received from Vaughan Constructions, on 3 March

2010, a quote for a proposed Masters store at Hawthorn at a rate of $1,047.74 per

square metre.252

118 Woolworths submit that after Mr Macmillan received a copy of Vaughan

Constructions’ estimate for the Strathdale store by email on 1 March 2010253 and the

first of the, so-called, NES “determinations” on 3 March 2010,254 he quickly formed

the view that the estimate of the Landlord’s Works Costs was higher than

248 Transcript 256–7. 249 Transcript 257. While Troons later provided an email that, on its face, quoted $780 per square metre

with full height panels, Mr Troon accepted this was probably a mistake: Transcript 514. There was no attempt to clarify why there was a discrepancy between the two Troons quotes. Mr Troon provided a further price on 17 March 2010 in which he added $200,000 for the full height panels: Court Book 3156; Transcript 515–6. Mr Blake said that he assumed the additional $200,000 was for the full height panels (Transcript 282), which, Woolworths submit, means that Mr Blake knew the rate of $780 per square metre did not include such panels.

250 Court Book 2978; Transcript 258. 251 It is to be noted that in their memorandum of 22 April 2010, Rider Hunt adopted the latter approach:

Court Book 3883. 252 Court Book 3074; Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [76]. 253 Court Book 3017–34. 254 Court Book 3076–7.


Woolworths’ expectations.255 Mr Macmillan’s evidence in this respect was, it is

submitted, based principally on a comparison with:

(a) the estimate provided by Rider Hunt on 10 December 2009 for a 13,465 square

metre Masters store, which Rider Hunt estimated at $12,104,254, or $899 per

square metre.256 This compared to Vaughan Constructions’ 1 March 2010

estimate for a 10,923 square metre store of $12,348,061, or $1,130 per square

metre;

(b) an estimate provided by another quantity surveyor used by Woolworths—

Slattery—who had estimated a build cost of $11,950,000 for a 13,500 square

metre store,257 or $885 per square metre; and

(c) the email that Mr Macmillan had received from Vaughan Constructions on

3 March 2010, which provided a quote for a proposed Masters store at

Hawthorn at a rate of $1,047.74 per square metre.258

Mr Macmillan said in his evidence that, as a result of noting these and other matters

which he described as discrepancies,259 on or about 3 March 2010 he arranged for

Mr Bob Killesteyn, Woolworths’ Construction Manager, Mr McDonald and Mr

Grigg to meet to review the NES “determination” of the Landlord’s Works Costs in

detail.260 It is said that this process met with Mr Blake’s approval. The basis of this

submission is an email of 12 March 2010 from Mr Blake to Mr Macmillan which,

omitting formal parts, is as follows:261

Thank you for arranging the meeting with Jordan Grigg allowing your team to view the “open book” constructing costing as provided by Vaughan Constructions for the Bendigo Home Improvement centre. I am advised that

255 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [71]–[75]. 256 Court Book 2194, 2296. 257 Court Book 2295; Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [72(c)]; Transcript

692. 258 Court Book 3074; Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [76]. 259 An example given is Vaughan Constructions’ design being larger than the size stipulated in the

Agreement for Lease, and the “cost saving” alternatives proposed by Vaughan Constructions which Woolworths regarded as unsatisfactory.

260 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [77]. Cf Defendants’ Closing Submissions (3 September 2015) [145].

261 Court Book 3090.


there is a subsequent meeting arranged for Tuesday 16th March to finalise the inspection.

I would be grateful if you could advise me of any costing issues that do not accord with WOW’s expectations or any amendments to the Design Kit that may influence the construction cost.

We have not received any information relating to the project from you for some time.

I would also appreciate an update to the progress with the Planning Minister as I have not received any information on this matter either.

Looking forward to hearing from you.

It is clear from this email that the process did meet Mr Blake’s approval but, as the

email indicates, it is clearly approval of a process of open discussion and inquiry in

which Mr Blake maintained involvement and not, as Woolworths would have it, a

process in the hands merely of Woolworths, Rider Hunt and Vaughan

Constructions.

119 Continuing, Woolworths submit that:262

NES had not, however, as Mr Blake accepted,263 provided with its determination its open book costing of the Landlord’s Works Costs. On 9 March 2010, therefore, Mr Blake instructed Vaughans to provide “all the costings to WOW, not just the final figures, or alternatively, access to the workings by WOW in the likely event they will ask their assessors/QS to view the file.”264

The document relied upon in this submission is an email from Mr Blake to

Mr Matthew Vaughan, copied to Mr Grigg, dated 9 March 2010 which, omitting

formal parts, is as follows:265

Costs Estimate under the WOW AfL Sec. 2 (a}(ii)

Last week I provided Woolworths a copy of your WOW Home Improvement Centre estimate in accordance with our AfL provision Sec. 2.2 (confidential extract attached).

I was today advised by my lawyers that my letter to WOW lacked the necessary detail to properly comply with the requirement of Sec. 2.2.

262 Defendants’ Closing Submissions (3 September 2015) [139] (emphasis omitted). 263 Court Book 3083. 264 Court Book 3083. 265 Court Book 3083.


Item 2.2 (a)(ii) required the Landlord to provide its costing on an “open book” basis. The estimate I provided WOW is not considered to be “open book”. I am advised that in order to properly fulfil the requirements I am required to provide all the costings to WOW, not just the final figures, or alternately, access to the workings by WOW in the likely event they will ask their assessors/QS to view the file.

Letter of Offer

Our Letter of Offer from WOW for this site requires us to ascertain the construction price of a comparable dimensioned “warehouse style hardware store, (full height pre-cast)” e.g. Bunnings and use that base cost to establish any amount the Tenant is required to contribute to the construction under Sec 2.2 (a)(iii) as the difference between the “Bunnings style” base cost and the WOW cost.

The current estimate provided by Vaughan allows a range of options not currently provided under our current comparable hardware store estimate. Could you please therefore remove the following items from your estimate and provide a fresh estimate with these items separately itemised:

- Power authority head works; and

- Site levelling with a fall greater than 300mm across the site.

This will assist us in providing comparable estimates.

Comparable Estimate

If you are able would you please assist us by providing a comparable D & C estimate for an “alternative hardware warehouse” e.g. Bunnings using the WOW site plan and external dimensions on the following basis:

- Warehouse of total dimensions 10,738m2 on a 24,700m2 site; - full height pre cast panels; - full architectural documentation; - DA application costs excluded; - power authority head works excluded; - fall no greater than 300mm across the site.

Could you also advise if you are comfortable providing the “open book” costings for WOW’s inspection.

Please contact me if you have any questions.

In my view, a reading of the whole email in context does not support the

submissions made by Woolworths in support of their contention that NES had failed

to provide open book costings at odds with the requirements of cl 2.2 of the

Agreement for Lease. Rather, in my view, the open book discussion process was one

which was contemplated in the email of 12 March 2010 from Mr Blake to Mr

Macmillan which is set out above.


120 In my opinion, this view of the discussions and email correspondence of 9 and

12 March 2010 to which reference has been made is supported by other events and

correspondence around this time. In particular, on 10 March 2010, Troons confirmed

that the cost to construct a Bunnings store using the Woolworths dimensions

remained at $780 per square metre266 or $8,375,640 plus GST. That estimate by

Troons was later revised by it, based on the Woolworths site plan and dimensions, to

$8,575,640 plus GST, or approximately $798 per square metre.267 Vaughan

Constructions also revised its estimate to construct a Bunnings store based on the

Woolworths site plan and dimensions to $8,733,070 plus GST based on a 10,738

square metre store, or $813.29 per square metre.268 The evidence of Mr McDonald

was that Rider Hunt was never provided with, and did not review, the cost to

complete an equivalent Bunnings store that had been provided by Troons. Indeed,

Troons did not participate in the open book process. Instead, Rider Hunt (who was

not a builder) and Vaughan Constructions (who had far less experience at building

Bunnings stores than did Troons) applied a cost to construct a Bunnings store of

$8,733,070.269 If applied, this assessment would have resulted in a Masters

contribution of $2,783,739.

121 In terms of the open book process, contrary to the position put by Woolworths, NES

contends that the process was conducted. On 9 March 2010, NES requested that

Vaughan Constructions make the calculations of its quote to construct the Bendigo

Masters store available to Rider Hunt, the quantity surveyor retained by

Woolworths to review the quote.270 This is in fact the email of this date between Mr

Blake and Mr Vaughan, copied to Mr Grigg, which is set out in the preceding

paragraphs. NES submits that the open book review process did commence on 12

March 2010 with a meeting between Vaughan Constructions, Woolworths and Rider

Hunt271 and that the open book review ended on 1 April 2010 when Rider Hunt

266 Court Book 3086. 267 Court Book 3156. 268 Court Book 3130. 269 Court Book 3130. 270 Court Book 3083. 271 Court Book 3119.


reported back to Woolworths.272 NES says that at the conclusion of the open book

review process, Rider Hunt estimated that the Landlord’s Works Costs that would

be payable was $3,247,195, as set out in an email dated 29 March 2010 from Mr

McDonald to Mr Killesteyn, copied to Mr Macmillan, which, omitting formal parts,

is as follows:273

We have reviewed the submission from Vaughans detailing the cost difference from the Bunnings store at Coburg and the proposed Project Oxygen store at Bendigo and note the following issues;

The Bendigo store is 10,923m2

The Coburg store upon which the comparison is made was built to a 2002 brief. We have not sighted this brief.

The Project O amenities, administration, mezzanine is 828 m2 compared with the Coburg store at 354 m2. The majority of the mezzanine cost difference (item 54) in the attached comparison exists because of the extra area. We question whether this is correct methodology as the rent may be struck on the area of the store which would then include for this extra cost.

The cost difference includes $200k for light fittings. We understand that this item will now be supplied by Oxygen.

Item 59 is the provisional sum for the floor finish at $30/m2. This does not reflect our understanding of the cost of the current floor specification but is in accordance with the information used by Vaughan.

A cost has been included for plant platform screens, these may not be required. We don’t have them on Braybrook & Coolaroo but may be a planning issue for this site.

The section highlighted in yellow on the attached spreadsheet is our view of the split of the extra cost between base build, site related costs, fitout and authorities fees.

The total difference is $3,247,195 inclusive of additional Preliminaries & Supervision, design fees (2.5%) and builders margin (5%). This has not been finally agreed with Vaughan yet.

This cost difference was materially greater than the revised contribution amount that

NES had sought from Woolworths of $2,941,169.274

272 Court Book 3296. 273 Court Book 3293. 274 Court Book 3288, 3343.


122 On 31 March 2010, Mr Blake received a telephone call from Mr Macmillan. In this

conversation Mr Macmillan again said that the Vaughan Constructions estimate was

not acceptable, yet again failed to provide any explanation as to why. Mr Macmillan

did not identify any specific issue with the Vaughan Constructions estimate and

offered no alternative. Mr Blake offered to obtain quotes from other builders if

Woolworths could identify any who would be prepared to quote for the work. No

such names were ever provided by Woolworths to Mr Blake.275 In the

circumstances, the only explanation for Mr Macmillan stating that the Vaughan

Constructions estimate was “not acceptable” on 31 March 2010, particularly where

the revised NES estimate of 26 March 2010276 was materially less than the 29 March

2010 estimate from Woolworths’ own quantity surveyor, Rider Hunt, is that the

Landlord’s Works Costs still exceeded Woolworths’ approved but undisclosed

budget.

123 The open book review finished on or around 1 April 2010.277 NES was not provided

with any of the reports or documents that had been prepared by Rider Hunt for

Woolworths as a part of that process, including the Rider Hunt estimate of 29 March

2010.278 Mr Macmillan admitted that it would have been reasonable for Woolworths

to provide the reports to Mr Blake and to discuss those reports with him but said

that even at 22 April 2010 the open book process was still ongoing.279 Mr Blake’s

oral evidence suggests that the process concluded earlier, but the contemporaneous

documentary evidence to the contrary is to be preferred.280

124 There are also other communications which, if not part of the open book review

process, at least related to it. For example, on 16 March 2010, Vaughan

Constructions provided an updated estimate to NES to construct a Masters store at

the Bendigo site with deductions, including for a site in accordance with the

275 Transcript 417, 713. 276 Court Book 3288, 3343. 277 Court Book 3296. 278 Court Book 3293. 279 Transcript 961. 280 Cf Transcript 315. See also Defendants’ Closing Submissions (3 September 2015) [60].


Agreement for Lease. The revised cost was $11,516,809 plus GST.281 These

amendments were, NES contends, based on discussions that had taken place

between Vaughan Constructions and Rider Hunt during the course of the open book

review process. On 6 April 2010, NES reduced the contribution amount that it

sought from Woolworths accordingly, to $2,941,169 plus GST.282 NES says that this

contribution amount was materially less than the $3,247,195 that Rider Hunt had

estimated at the end of the open book review process, referring to the email of

29 March 2010 which is set out in the preceding paragraphs of these reasons. NES

submits that this contribution amount ought to have been accepted by Woolworths,

but it was not.

125 The Woolworths perspective in relation to dealings between the parties during this

period is somewhat different from that put by NES. Woolworths say that the first

meeting between Rider Hunt and Vaughan Constructions took place on 12 March

2010 and that, according to Mr McDonald’s evidence, most of the discussions with

Vaughan Constructions were directed to understanding their offer and that it took

time to “tease out the detail of that and to identify what was included in it”.283

Moreover, it is said that it was not, as put to Mr McDonald, directed to achieving

cost savings or to bring the Strathdale site in at $12 million.284 It is submitted that the

price plan was for a generic Masters store of 13,500 square metres and had no

bearing on the exercise being conducted between Rider Hunt and Vaughan

Constructions for the Strathdale site. Moreover, it is contended that Mr McDonald

was unaware of there being any budget for what Woolworths was prepared to

contribute for the Strathdale site,285 and was given no instructions as to what the

difference should be.286 Mr McDonald’s evidence was that following the meeting on

12 March 2010, he received from Vaughan Constructions and reviewed a copy of the

Vaughan Constructions proposal of 1 March 2010, a proposal containing their

281 Court Book 3130. 282 Court Book 3345. 283 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [77]. 284 Transcript 1286–9. 285 Transcript 1290–1. 286 Transcript 1325—this being a proposition that was not put to Mr Macmillan.


calculation of the Landlord’s Works Costs,287 noting a number of aspects of it that

did not accord with his understanding of what ought to be included in that

calculation.

126 As observed in the Woolworths submissions, Mr Grigg reported to Mr Blake on the

outcome of this first meeting, including that a further meeting had been arranged for

16 March 2010. The report was contained in an email from Mr Grigg to Mr Blake

sent on 12 March 2010, an email which also contains a list of the topics discussed at

the 12 March 2010 meeting, in the following terms (omitting formal parts):288

Confirming our discussion today, Vaughans held an initial discussion meeting at our office this morning at Bam with Woolworths (Bob Killesteyn) and Rider Levett Bucknall (Ewan McDonald).

At this meeting we discussed the following topics:

1. Breakup of current price for Bendigo

2. Treatment and estimate of site specific costs

3. Recommended design changes to cater for site levels

4. Identified cost differences between Woolworths Hardware and Bunnings specification (eg. $3m extra over cost on base building)

5. Open book discussion (at high level) regarding these individual extra over costs

6. Mechanism for undertaking detailed assessment and open book review of extra over cost differences between Woolworths expectations and Vaughan identified items.

7. Developer/Woolworths date for final sign off being 20th April and programme of how to ensure fast tracked process is implemented to enable agreement on final extra over cost difference well before this date.

We confirm a meeting has been scheduled at our office on Tuesday 16th March at 3:30-4pm to undertake the detailed “open book” assessment and we will report to you following completion of this meeting.

Please feel free to contact me with any queries.

This email was, in turn, forwarded to Mr Macmillan by Mr Blake later on the night

287 Court Book 3018, 4012. 288 Court Book 3094–5.


of the same day, together with the following email (omitting formal parts):289

Thank you for arranging the meeting with Jordan Grigg allowing your team to view the “open book” constructing costing as provided by Vaughan Constructions for the Bendigo Home Improvement centre. I am advised that there is a subsequent meeting arranged for Tuesday 16th March to finalise the inspection.

I would be grateful if you could advise me of any costing issues that do not accord with WOW’s expectations or any amendments to the Design Kit that may influence the construction cost.

We have not received any information relating to the project from you for some time.

I would also appreciate an update to the progress with the Planning Minister as I have not received any information on this matter either.

Looking forward to hearing from you.

This email was, as also observed in the Woolworths submissions, the first of four

requests for information that were emphasised by NES.290

127 Concluding its submissions in relation to this 12 March 2010 email correspondence,

Woolworths contend that:291

Manifestly, however, there was nothing of substance for Mr Macmillan to respond to or report on until the discussions between [Rider Hunt] and [Vaughan Constructions] produced something to report.

This submission is consistent with the Woolworths approach to the construction of

cl 2.2, namely that NES was to provide a “determination” of Landlord’s Works Costs

and that until then, there was no obligation on Woolworths to take part in any open

book process consistently with obligations under the Agreement for Lease and the

Letter of Offer. For the reasons discussed elsewhere in these reasons for decision, I

do not accept this position and, more particularly, am of the view with respect to the

events now being considered, that the email correspondence and the 12 March 2010

meeting were steps and events consistent with a proper interpretation of the

requirements of cl 2.2 of the Agreement for Lease. As discussed in further detail

elsewhere, it was then incumbent upon the parties to work through the information

289 Court Book 3094. 290 Transcript 696–700. 291 Defendants’ Closing Submissions (3 September 2015) [142].


available to them and request additional detail or further information for this

purpose consistent with the “contractual objects”.292

128 An aspect of the process as between the parties in March and April 2010 which is in

controversy is whether Mr Blake was, as he says he was, excluded from the meetings

between Rider Hunt and Vaughan Constructions.293 Mr Macmillan denies telling

Mr Blake he could not attend those meetings and had no recollection of Mr Blake

ever asking to attend.294 Woolworths submit that the evidence of Mr Macmillan in

this respect should be accepted on the basis that it is supported by the

contemporaneous documents and course of events and that, having heard Mr Blake

give evidence, the Court will, no doubt, have formed the view that he is an

intelligent, experienced and forceful businessman who would have insisted he be

allowed to attend these meetings had he wished to. Moreover, it is said that there

would be a paper trail of emails or solicitors’ correspondence concerning the issue if

Mr Blake’s insisting on his right to attend these meetings had been rejected by

Woolworths. Finally, it is submitted that any suggestion that Mr Blake would

meekly accept being excluded from these meetings is not credible. As I do readily

accept that Mr Blake is clearly an intelligent, experienced and forceful businessman,

it is difficult to accept that he could have been excluded from these meetings had he

wished to attend. This is, however, in my view, not a critical issue and the answer to

these apparently different positions may well be some misunderstanding or faded

recollection as to the then–perceived importance of attendance at these meetings.

The latter is, in my view, supported by the reference in the Woolworths submissions

that it is apparent from Mr Grigg’s report to Mr Blake that Vaughan Constructions

and Rider Hunt were working out for themselves, or at least working through, the

proper calculation of the Landlord’s Works Costs and the cost differences in the

Bunnings specification.295 Moreover, it is said that both Mr Blake296 and Mr

292 See above [55]. 293 Outline of Brendan Edward Blake (6 March 2015) [199]; Transcript 250–2. 294 Further Outline of Evidence of Timothy Stuart Macmillan in Reply (31 March 2015) [20]; Transcript 689. 295 Transcript 1290. 296 Transcript 308. See also NES’s oral submissions at Transcript 80.


Macmillan297 conceded that they did not understand the breakdown of the cost items

in a detailed way. As Woolworths say, it appears that they each therefore relied, to a

large extent, on the process taking place between Rider Hunt and Vaughan

Constructions to identify the relevant differences. I agree that this is hardly

surprising and, as Woolworths submit, “[t]he matters may have been quotidian for

[Vaughan Constructions and Rider Hunt], but plainly they were not for the parties to

this litigation”.298 Consequently, it is difficult to see that Mr Blake would have

gained anything from attending these meetings other than sitting on the side lines,

leaving those more expert and experienced in the process of costing quotes to

continue their discussions and their work. For reasons discussed elsewhere, it

should be observed that it does not follow on this basis that Vaughan Constructions

must therefore, necessarily, have been acting as the agent of NES in this process.299

129 In relation to the whole process of communications between the parties with respect

to the Landlord’s Works Costs, Woolworths pursue the position, consistently with

the position they advocate with respect to the interpretation of the parties’

obligations under cl 2.2 of the Agreement for Lease, that NES failed to provide its

open book costing. Thus, it is submitted:300

It is also apparent, as Mr McDonald noted,301 that NES’s failure to provide its open book costing, in apparent breach of its obligation under cl 2.2(a), meant that much of the time and effort spent by RLB and Vaughans was directed towards RLB being able to identify the basis for the so-called LWC figure put forward by NES. This can also be seen by the list of topics identified at this first meeting, as set out in the email from Mr Grigg to Mr Blake.302

130 The concluding reference to the email from Mr Grigg to Mr Blake is to the email of

12 March 2010, which sets out the topics which were discussed at the meeting held

on that day. The text of that email, which has been set out in the preceding

paragraphs, sets out a range of matters which might sensibly, in my view, be seen as

an outline of a process adopted by the parties to work through relevant issues for the

297 Transcript 699, 843, 960. 298 Defendants’ Closing Submissions (3 September 2015) [144]. 299 See below [195]–[207]. 300 Defendants’ Closing Submissions (3 September 2015) [145]. 301 Transcript 1287. 302 Court Book 3090.


determination of the Landlord’s Works Costs in a manner which is consistent with

the parties’ obligations under cl 2.2 of the Agreement for Lease. In my view, it is

difficult to accept that parties seeking to advance the “contractual objects” would

regard these topics or the process inherent in this list as anything but a useful and

constructive way of seeking to reach a position on Landlord’s Works Costs. In my

view, the summary of communications and events from 12 March 2010 until the

meeting on 22 April 2010 as set out in the Woolworths submissions are indicative of

the process which flows from this list of topics and, if anything, indicate an

agreement between the parties that this was a sensible and appropriate way to

proceed. I do not see that process as supporting in any way Woolworths’ thesis that

these communications and events were indicative of a failure on the part of NES

with respect to its obligations under cl 2.2 of the Agreement for Lease. I turn now to

the detail of these communications and events as set out in the Woolworths

submissions which, for these reasons, do, in my view, support the position I have

indicated.

131 Mr McDonald’s evidence was that, instead of reviewing the Vaughan Constructions

estimate or Troons estimate—on which the NES estimate was based—so as to

identify any issues that Woolworths may have had with the calculations or

assumptions contained in it, the first meeting of the open book process, which was

held on 12 March 2010 (at a time when Rider Hunt had received the quotation),

identified the following action items:303

(a) to consider whether certain design development savings could be achieved;

(b) to identify the difference in works between a generic “Project Oxygen” store

and a “generic Bunnings store”;

(c) to ensure that fit-out items that were to be supplied and installed by the

landlord did not form part of the generic base building costs; and

(d) to obtain a list of the differences between “a generic Bunnings… store” and

303 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [11]; Court Book 3113.


“the generic Masters Design Brief”.

132 The first step identified by Woolworths in that process was the provision by

Vaughan Constructions on 15 March 2010 of its “extra over” list from a Bunnings

specification that Vaughan Constructions had from a store in Coburg.304 From this

list, Mr McDonald identified a number of items that he considered to be outside of

the Masters brief that Mr Grigg had included in the Vaughan Constructions estimate

of the Landlord’s Works Costs for the Masters store.305 These included power

supply costs of $75,000, water and sewerage costs of $25,000, and fit-out items of

$455,000. In order to assist Vaughan Constructions, on the same day, 15 March 2010,

Mr McDonald sought and obtained permission from Woolworths to send to Mr

Grigg a copy of Rider Hunt’s comparison from December 2009.306 Mr McDonald

also sent to Mr Grigg a list of fit-out items to be excluded from the tenant’s

contribution,307 and an “extra overs” list between the generic Masters brief and a

Masters store to be constructed in Braybrook.308 Later on 15 March 2010,

Mr McDonald wrote to Vaughan Constructions, as part of the generic cost

comparison exercise, identifying fit-out items to be included in a generic Oxygen

(Masters) store, including items that needed to be installed as part of the base

building works, which were to be paid for by Masters. Mr McDonald noted that the

base building price should exclude any fit-out items to be installed during the base

building works and that these were to be identified separately.309

133 On 16 March 2010, a meeting took place between the representatives of Vaughan

Constructions and Rider Hunt. Following that meeting, Vaughan Constructions

provided to Mr Blake, by email, an estimate for the Landlord’s Works Costs that

removed the costs associated with power authority and other authority head work

costs, site levelling and town planning costs, to the amount of $831,252.310 These

304 Court Book 3109, 3117; Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [14]. 305 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [15]. 306 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [16]; Court Book 2421, 3111, 3125–6. 307 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [17]; Court Book 3121. 308 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [20]; Court Book 3146, 4234. 309 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [17]; Court Book 3121. 310 Court Book 3133–6.


were costs to be borne by NES under the Agreement for Lease and the net effect of

these deletions, if accepted, would be to reduce the Landlord’s Works Costs to

$11,516,809, and the tenant’s contribution to $2,783,739. The effect of this was not,

however, it is said, communicated to Woolworths at this time. In the same email,

Vaughan Constructions also provided to Mr Blake an estimate for an alternative

Bunnings store design of 10,738 square metres for $8,733,070 plus GST, or costing at

the rate of $813 per square metre.311 Mr Grigg provided his further estimates to Mr

Blake “for your negotiations with Woolworths/Bunnings”.312 Woolworths contend

that the reference to “Bunnings” was no doubt no slip. Where this leads, however,

in the context of these proceedings is not clear, as there is no allegation of any

dealings as between Mr Blake and Bunnings, assuming that there were any, at odds

with the position of NES that it was seeking to fulfil its obligations under cl 2.2 of the

Agreement for Lease.

134 Following the meeting on 16 March 2010, Mr Blake sent an email to Mr Macmillan in

which Mr Blake said he had been advised, presumably by Mr Grigg, that the “open

book” inspection was due to be completed “tomorrow”, that is, 17 March 2010, and

that he looked forward to receiving Mr Macmillan’s comments.313 Woolworths

observe in their submissions that this is the second of the requests for information

given emphasis by NES, but that, clearly, at this point the process between Rider

Hunt and Vaughan Constructions was not expected to complete on 17 March 2010,

no matter what Mr Blake had been told. It is said that it should be inferred that Mr

Grigg updated Mr Blake after this email as to the progress of the process that was

still being undertaken, and that the process would not be ending on 17 March 2010.

It is not clear where this observation leads and, in any event, I do not regard these

communications as being inconsistent with the general position already outlined

with respect to these communications and events as between the parties following

on from 15 March 2010.

311 Court Book 3133–6. 312 Court Book 3133. 313 Court Book 3137.


135 On 17 March 2010, Mr Blake received an estimate from Troons to “design/construct

the new Bunnings warehouse at Bendigo”.314 This was an estimate for a store of

10,738 square metres for $8,575,640 (plus GST), or costing at $798 per square metre.

This quote was not provided to Rider Hunt.315 It is not clear what significance is

attached to this failure in the context of these proceedings and the ultimate position

taken by Woolworths in the course of dealings with NES. In any event, there is no

suggestion that Rider Hunt is anything but expert in estimating relevant costings, so

I am of the view that this decision or omission on the part of Mr Blake has no

significance in the present context.

136 On or about 18 March 2010, and as part of the cost identification process,316

Mr McDonald received from Vaughan Constructions a spreadsheet that set out a

comparison between the item costs for a “Bunnings S9 store” and Vaughan

Constructions’ estimate for the Masters store at the Strathdale site and then listed its

assessment of Rider Hunt’s value for certain items and any difference.317 On

19 March 2010, Mr Macmillan informed Mr Blake that Woolworths were continuing

with discussions with Vaughan Constructions and Rider Hunt, and that Woolworths

hoped to provide further feedback early in the following week.318 However, at about

the same time on 19 March 2010, Mr Macmillan gave written notice to NES that the

contribution amount that had been sought was not acceptable. Again, no attempt

was made to identify any point of difference between the parties or to resolve any

difference in relation to the estimate. Mr Macmillan stated:319

I wish to confirm that the [Landlord’s Works Costs] contribution you require … is not acceptable. As outlined in your email, we are having continuing discussions with Vaughan Constructions and our consultants regarding this matter. We hope to receive further feedback from our consultants early next week.

As discussed in the preceding reasons, this email was sent after the decision had

314 Court Book 3156. 315 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [8]. 316 Further Outline of Evidence of Ewen Kenneth McDonald in Reply (31 March 2015) [13(b)]. 317 Court Book 3163; Transcript 1265. 318 Court Book 3164. 319 Court Book 3167.


already been made by the Woolworths Property Committee to pursue the Hume &

Iser site and before the open book review process had been completed. However, in

an email dated 21 March 2010,320 Mr Blake said he would appreciate an update “as to

where you are at regarding the construction costs and the development

contribution”. Woolworths say that this is the third of the requests for information

given emphasis by NES. As to this, Woolworths submit that as Mr Macmillan had

just sent his email on 19 March 2010, a Friday, and Mr Blake sent this further email

on 21 March 2010 at 9.30pm, a Sunday, it was not reasonable to expect that

Mr Macmillan would have anything further to report. In any event, it is said that

Mr Macmillan responded to this further email by an email the following day,

Monday 22 March 2010, in effect repeating what he said in his email of 19 March

2010, that Rider Hunt and Vaughan Constructions were continuing their discussions,

and that he, Mr Macmillan, hoped to be in a position to report later that week, or

early the next week.

137 On 21 March 2010, Mr Blake responded that the planning application could not

proceed until agreement was reached by the parties on the Landlord’s Works Costs,

and that Woolworths’ design specifications may need to be amended to reduce the

cost. Mr Blake sought an update as to Woolworths’ position regarding the

construction cost and development contribution.321

138 Again, in an email sent on 22 March 2010, Mr Macmillan said to Mr Blake that

Woolworths would not indemnify NES to undertake the planning application prior

to agreeing the Landlord’s Works Costs and that:

In regards to Landlord’s Works Costs, our consultants are continuing to have discussions with your builder Vaughan’s. We hope to have further feedback later this week (or early next week at the latest) regarding those ongoing discussions. As you are aware the Landlord’s Works Costs as indicated by you are not acceptable to Woolworths.322

139 On 22 March 2010, Mr McDonald received from Vaughan Constructions further

320 Court Book 3170. 321 Court Book 3170. 322 Court Book 3183.


information which he says enabled him to confirm that Vaughan Constructions had

included fit-out costs to the value of $455,000 in its estimate for the Landlord’s

Works Costs.323 This is, however, a matter of some controversy between the parties,

though in the overall context of dealings between them—having regard to their

obligations under cl 2.2 of the Agreement for Lease and the ultimate position taken

by Woolworths—it is not a matter of critical importance.

140 By letter dated 26 March 2010, Fetter Gdanski, solicitors for NES, wrote to the

solicitors for Masters setting out NES’s adjusted “determination”—as Woolworths

put it in their submissions—for the tenant’s contribution of $3,772,421.324 Having

regard to the importance and characterisation given to this communication in the

Woolworths submissions, it is desirable to set out the contents of this letter (omitting

formal parts):325

Re: North East Solution Pty Ltd (“North East”) to Shellbelt Pty Ltd (“Shellbelt”) Woolworths Guarantor Agreement for Lease dated 24 February 2010 (“AfL”) Property: 195 Mclvor Road, Strathdale, Victoria

We have been instructed as follows:

1. that, for the purposes of cl 2.2(a)(ii) of the AfL, your client’s consultants have been given the opportunity to and did inspect all records of Vaughan Constructions Pty Ltd, our client’s proposed builder, to ascertain the basis of our client’s Works Costs of $12,348,061 plus GST.

2. that the inspection was completed on Tuesday, 23 March 2010 and, accordingly, our client has complied with all its obligations under cl 2.2(a)(ii) of the AfL.

3. that the contribution to the Works Costs our client requires from your client under cl 2.2(a)(ii) of the Aft. will be $3,772,421 (less the cost of any earth works and power connection costs to the land which our client will be happy to estimate on your client’s request).

That is the difference (less those costs) between the Vaughan price for a building constructed in accordance with your client’s Briefing Kit and the cost of another building of the kind described in paragraph 13 of your client’s letter of offer dated 2 June 2009 as a “major trade supply restricted retail premises (full height precast)” (which our client has ascertained would be $8,575,640 plus GST not including the aforementioned earth works and

323 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [21]. 324 Court Book 3288. 325 Court Book 3288.


power connection costs).

Our client further instructs us that, in accordance with cl 2.2(b) of the AfL, it is willing to enter into any discussions in relation to the Works Costs your client cares to have.

We look forward to hearing from you in due course.

Woolworths submit that while there was an adjustment in this letter to the initial

Landlord’s Works Costs amount by $200,000, to reflect the inclusion of full height

panels,326 the letter simply noted that the contribution will be “less the cost of any

earth works and power connection costs to the land which our client will be happy

to estimate on your client’s request”. It is said in the submissions that it is not clear

why NES did not deduct the price for these matters at this time, as the figure was

readily available from the Vaughan Constructions report of 16 March 2010.327 The

submissions in this respect conclude with the sentence: “To put it mildly, this is

another example of NES’[s] somewhat cavalier approach to the negotiations.”328 In

my view, this characterisation is quite uncalled for, having regard to the content of

the letter, in which context the quoted passage must be viewed, and also in the

context of the dealings between the parties—sophisticated commercial parties which

were well able to discuss and negotiate these type of issues as they would be

expected to do having regard to their obligations under cl 2.2 of the Agreement for

Lease. The Woolworths submissions with respect to this letter conclude with the

comment that it should also be noted that the statement in the letter that NES was

“willing to enter into any discussions in relation to the Works Costs your client cares

to have”, is the fourth and final written request for an update emphasised by NES.329

Continuing, these submissions query how it is put that there was any failure to

respond to this. Again, I repeat the comments or observations just made with

respect to these parties and their obligations under cl 2.2 of the Agreement for Lease.

141 In relation to the 26 March 2010 letter to which reference has been made,

326 Mr Troon provided a further price on 17 March 2010 in which he added $200,000 for the full height

panels: Court Book 3156; Transcript 515–6. 327 Court Book 3133; Transcript 286. 328 Defendants’ Closing Submissions (3 September 2015) [156]. 329 Defendants’ Closing Submissions (3 September 2015) [157].


Woolworths note in their submissions that the basis of the tenant’s contribution

figure put forward was the Troons quote of 17 March 2010. On this basis,

Woolworths further observe that, despite being aware that Vaughan Constructions

and Rider Hunt were engaged in the process to determine the Landlord’s Works

Costs and the difference between the Landlord’s Works Costs and the cost of a

Bunnings store,330 Mr Blake did not, as previously observed, provide this quote to

Rider Hunt.331 Nevertheless, it is said that it was used by NES in the 26 March 2010

letter332 for the “determination” of the tenant’s contribution instead of the higher

Vaughan Constructions estimate provided on 16 March 2010.333 Thus, Woolworths

submit that this was an opportunistic attempt by Mr Blake to “extract” more money

from Woolworths by providing to it an estimate based upon a quote that Troons had

provided for an actual proposal to build a Bunnings store on the site. Again,

whether or not this observation and the submissions based upon it have any

foundation with respect to Mr Blake’s motives or intentions, it does not affect the

veracity of the process which the parties were undertaking under cl 2.2 of the

Agreement for Lease at this stage, having regard to the experience and expertise of

the entities involved in that process.

142 On 29 March 2010, Mr McDonald sent to Mr Killestyen, and copied to Mr Macmillan,

an email from Vaughan Constructions that attached an amended version of the

spreadsheet he had received from Vaughan Constructions on 18 March 2010.334

Mr McDonald reviewed this Vaughan Constructions spreadsheet and, in his

covering email, noted a number of queries still to be resolved. These included:

(a) that he had not seen the Bunnings brief that Vaughan Constructions had used

for their comparison. In several cases, therefore, he adjusted the estimate for

Bunnings costs to reflect the Bunnings brief that he was familiar with;335

330 Transcript 284. 331 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [8]. 332 Court Book 3133. 333 Court Book 3133. 334 Court Book 3161. 335 Transcript 1265.


(b) whether the correct methodology had been used to account for the cost of the

mezzanine area (valued at $1,145,706);

(c) whether the costs of the floor finish (valued at $195,930) were correct; and

(d) whether plant platform screens (valued at $719,935) were required.

Mr McDonald highlighted in yellow on the spreadsheet Rider Hunt’s view of the

correct split between the base build, site fees, fit-out costs and authorities fees. It is

said that it was only the column headed “base build” which was relevant to the

assessment of the Landlord’s Works Costs, with the rest of the items to be excluded

from that amount. Woolworths submit that the sum of the base build column was

$2,573,493.26, but that it was, clearly, subject to resolution of the items the subject of

Mr McDonald’s queries, which totalled over $2 million. It is accordingly wrong to

suggest, as NES does, that this spreadsheet represented some form of “verification”

by Rider Hunt of the amount of the Landlord’s Works Costs or of the Tenant’s

contribution. On its face it was no such thing and, in any event, the evidence

showed that Rider Hunt and Vaughan Constructions continued to exchange

information and to meet. Further, Woolworths submit that it is accordingly wrong

to suggest, as NES does, that this spreadsheet represented some form of

“verification” by Rider Hunt of the amount of the Landlord’s Works Costs or the

tenant’s contribution. On its face, it is said, it is no such thing and, in any event, the

evidence showed that Rider Hunt and Vaughan Constructions continued to

exchange information and to meet. Mr Macmillan did not consider it a final

figure.336 It was a work in progress.337

143 NES submits that Mr McDonald’s evidence that he “assumed”338 the $455,000 had

been included (despite asking for339 and receiving a detailed breakdown of fit-out

costs that had been included, which did not include these items340) is at best

336 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [90]; Transcript 910. 337 Transcript 1289, 1293. 338 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [15(c)]. 339 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [27](b); Court Book 3384. 340 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28]; Court Book 338–6.


implausible and should not be accepted. Either, it is submitted, Mr McDonald

mistakenly believed these items had been included or he well knew they were not

included by Vaughan Constructions but sought to assist Woolworths in its

negotiations by including adjustments for the items anyway (just as he had done by

including adjustments that had already been made and variations, as if they were

existing differences between the parties). In either case, it is submitted, the Court

should find that had Woolworths acted reasonably and in good faith no adjustment

would have been required. For the reasons which follow, it is not necessary to form

a concluded view on these matters.

144 It appears the only adjustment in the 22 April 2010 letter that may have been

warranted was the adjustment for the $123,497 of fit-out works, assuming those

works were not part of the base building works and had been included in the

Vaughan Constructions quotation (which the “Bendigo Fitout Costs” document

suggests may be the case).341 Had that adjustment been warranted, one may

reasonably assume Rider Hunt would have raised this adjustment with Vaughan

Constructions or Woolworths would have raised it with NES. They did not.

However, even if the contrary was the position, and an adjustment of $123,497 was

to be made, this would result in a contribution by Woolworths of $2,817,672. This

adjustment would have a minor (if not immaterial) impact on NES’s loss and

damage in the proceeding (as set out below).

145 Mr McDonald’s evidence that the $455,000 of fit-out costs was included in the

Vaughan Constructions quotation as it was specified in the Woolworths Design Brief

on which that quote was based342 is, in my view, not correct. The Design Brief343

does not specify any such costs. Nor does the Vaughan Constructions quotation

itself.344 The “Project Oxygen—Generic Base Building—Provisional Sum

Schedule”345 on which Mr McDonald purports to rely does not form part of the

341 Court Book 3386. 342 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [21]. 343 Court Book 2106. 344 Court Book 3052. 345 Court Book 4241.


Design Brief346 or the Vaughan Constructions quote,347 nor was it referred to as

forming part of the design documentation on which the Vaughan Constructions

quotation was based.348 The document has not been proven by any witness. It was

not put to any NES witness. There is no evidence of who produced the document,

when it was produced or what it represents. The document appears to have been

created by Vaughan Constructions349 as part of the exercise of identifying for

Woolworths the cost differences between a generic Bunnings store and a generic

Masters store which listed fit-out items totalling $455,000 as needing to be included

in a generic Masters store (rather than the Bendigo store). Contrary to Mr

McDonald’s evidence, this document cannot assist the Court in determining whether

Vaughan Constructions included this amount in its quote for the Bendigo Masters

store, particularly where Vaughan Constructions had been advised on numerous

occasions350 that only costs that were to be borne by Woolworths were to be

included. The only evidence of what fit-out costs were included is in a list of fit-out

items in a Vaughan Constructions document headed “Bendigo Fitout Costs”

(printed 14 April 2010),351 which was provided in response to a request for that very

information,352 which does not include the $455,000 amount.

146 In my view, it is clear from Mr McDonald’s own witness statement and from the

contemporaneous documents referred to in it, that the true origin of Mr McDonald’s

belief was in fact an “assumption”353 on the part of Mr McDonald that because the

fit-out amount had been included in an “extra over” list354 and build soft files355

provided to Rider Hunt by Vaughan Constructions, as part of the generic cost

comparison exercise,356 it must also have been included in the Vaughan

Constructions quotation. Even if Mr McDonald had (mistakenly) assumed this, it is

346 Court Book 2106. 347 Court Book 3052. 348 Court Book 3055. 349 Court Book 4244. 350 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [11(c)], [17], [19], [27]. 351 Court Book 3386. 352 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [27(b)]; Court Book 3384. 353 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [15(c)]. 354 Court Book 3109, 3117. 355 Court Book 3159, 3181. 356 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [14], [21].


difficult to see how Mr McDonald could continue to assume that the fit-out costs had

been included once he specifically requested that Vaughan Constructions provide “a

detailed breakdown of the cost items included in their assessment of the Landlords

Works Costs for fit-out works” for the Bendigo site357 and had been provided with a

break-down that did not include those costs.358 Having regard to these matters,

Mr McDonald’s evidence that he took this response to be “additional” fit-out costs is

simply not credible.359 When these matters were put to Mr McDonald in cross

examination, Mr McDonald admitted that if his account of events was to be

accepted, he had asked for a complete list of fit-out items that had been included but

had been provided with an incomplete list in response.360 When asked why he did

not seek further information if he thought the list was incomplete, Mr McDonald

gave evidence to the effect that there was a common “understanding” (the basis of

which was never disclosed) between Vaughan Constructions and Rider Hunt that

the fit-out amount had been included.361 This evidence is contradicted by

Mr McDonald’s own witness statement in which he states that he “cannot now recall

whether [Vaughan Constructions] mentioned to him that they had used the

Provisional Sums figure from the Design Brief of $455,000 in their assessment.”362

That Mr McDonald’s recollection has improved is improbable. His assertion that

there was some understanding should, for the preceding reasons, be rejected.

147 In any event, it is not necessary to determine whether Mr McDonald in fact

“assumed” the fit-out costs were included in the Vaughan Constructions quotation

or believed the response to his request included only “additional” fit-out costs. If Mr

McDonald did make this assumption or hold this belief he was, in my view, for the

preceding reasons, plainly mistaken. However it follows that if Mr McDonald did

hold this mistaken belief, it would have been corrected readily by NES or Vaughan

Constructions had Rider Hunt or Woolworths raised the proposed adjustment with

357 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [27(b)]; Court Book 3384. 358 Court Book 3385–6. 359 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28(a)]; Transcript 1331. 360 Transcript 1308. 361 Transcript 1324. 362 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [15(c)].


either of them; but it was never raised. It would not, however, have altered the

agreed contribution amount which is set out above.

148 Whatever view may be taken of Mr McDonald’s credibility, whatever Mr McDonald

or Rider Hunt may have assumed, there is no evidence that the $455,000 of fit-out

items were included in the Vaughan Constructions quotation or needed to be

removed. Rider Hunt was mistaken in including an adjustment for the $455,000 in

the 22 April 2010 letter, just as Rider Hunt was wrong to include the out of date

quotation, adjustments that had already been made and variations. Had

Woolworths and Masters acted reasonably and in good faith, the agreement that

would have been reached as to the Landlords’ Works Costs and Masters’

contribution would not have included the adjustments and variations in the 22 April

2010 letter. The only adjustment in the 22 April 2010 letter that may have resulted in

any reduction in Masters’ contribution was the adjustment of $123,497 for fit-out.

That adjustment was never raised with Vaughan Constructions and therefore cannot

be properly tested. If it were the case that the Landlord’s Works Costs should have

been reduced by this amount, the evidence of Mr Blake was that he would have

accepted the lesser contribution amount.363 The adjustment makes no material

difference to NES’s loss and damage in the proceeding.

149 In my view, the contents of this spreadsheet and the debate between the parties as to

its contents and the relevance and significance of its contents simply serves to

highlight that it was a document prepared in the course of the process of discussion

between, particularly, Rider Hunt and Vaughan Constructions as part of the settling

of the Landlord’s Works Costs in the context of the process adopted by the parties

for the purposes of cl 2.2 of the Agreement for Lease. Indeed, this is, in my view,

confirmed by the evidence in that Mr McDonald readily agreed that a number of the

outstanding items from the line by line exercise with respect to the Vaughan

Constructions spreadsheet of 18 March 2010 had not been discussed with Vaughan

Constructions or resolved with them.364 This was because, however, a different

363 Outline of Brendan Edward Blake (6 March 2015) [232]. 364 Transcript 1295–8.


approach was subsequently adopted by Rider Hunt and Vaughan Constructions to

identify the cost difference—the so-called “macro-level” approach of comparing the

overall cost of a Bunnings store with the Vaughan Constructions estimate of the

proposed Masters store and deducting from that the items that ought not to have

been included in the Vaughan Constructions estimate for the Masters store.365 This

macro approach was first used by Vaughan Constructions and then adopted by

Rider Hunt.366 On 31 March 2010, Mr Grigg wrote to Mr Blake confirming that Rider

Hunt may still require further information, for example, a bill of quantities, in order

to assess the “base hardware store”.367 Apart from this particular aspect of this

email, its contents are also indicative of and, in my view, can describe consistently

with previous correspondence and events the process agreed and adopted between

the parties for the purpose of calculating the Landlord’s Works Costs under cl 2.2 of

the Agreement for Lease. Omitting formal parts, the email is as follows:368

To confirm our earlier discussions, quantity surveyors Rider have completed their “open book” assessment of your project and are reporting to Woolworths tomorrow.

I have spoke [sic] to Ewan McDonald this afternoon who confirmed Vaughans cannot do anymore [sic] at this stage without Riders further instruction from Woolworths. He mentioned there may be a need to further assess the “base hardware store” bill of quantities benchmark inclusions. I confirmed a BOQ is available for this purpose and we will make available at our office when requested.

I believe Tim McMillan [sic] is due to call you shortly to discuss “where to from here” and please feel free to call me if you require any further assistance.

150 Woolworths submit that:369

On 6 April 2010, Fetter Gdanski wrote to Masters’ solicitors to the effect that NES’ “determination” of the LWC had been reduced to $2,941,169,370 having now deducted the $831,252 from its determination of the LWC for the items referred to in the 26 March 2010 letter.371 This letter also stated for the first time

365 Further Outline of Evidence of Ewen Kenneth McDonald in Reply (31 March 2015) [13(j)]; Transcript 1298–

9. 366 Transcript 1299–300. 367 Court Book 3296. 368 Court Book 3296. 369 Defendants’ Closing Submissions (3 September 2015) [163]. 370 Court Book 3345. 371 Court Book 3345.


that NES required any contribution to the LWC by Masters to be made as a lump sum at the commencement of construction of the works.372 As noted above, the LOO was completely silent on when any lump sum was to be paid, and cl 2.2 of the AFL left the entire question of the manner of payment of any contribution to be agreed. Given Woolworths’ commercial practice in this regard and the fact that the timing of the payment had not been raised prior to this time, Macmillan gave evidence that he was “surprised” at the receipt of this letter.373

These submissions are consistent with the Woolworths thesis that there needed to be

a “determination” by NES for the purposes of the process under cl 2.2 of the

Agreement for Lease and that until this had been provided, there could be no “open

book” process. As indicated in these reasons, particularly in the preceding

discussion, the parties had proceeded with a process for determining the Landlord’s

Works Costs for the purposes of these provisions. In any event, turning to the

6 April 2010 letter, it is, in this context, artificial and inaccurate to characterise the

contents of this letter as a further “determination” by NES. It is, rather, simply part

of the continuing communications, oral and written, between the parties for the

purposes of the cl 2.2 process, as its actual contents taken in context do, in my view,

show. Omitting formal parts, the 6 April 2010 letter from Fetter Gdanski is as

follows:374

Re: North East Solution Ltd (“North East”) to Shellbelt Pty Ltd (“Shellbelt”) Woolworths Limited (“Woolworths”) Guarantor Agreement for Lease dated 24 February 2010 (“AfL”) Property: 195 Mclvor Road, Strathdale, Victoria

Further to our letter to you dated and sent by e-mail on 26 March 2010, we confirm the following:

1. Our client’s instructions that your client’s Quantity Surveyor has apparently sought further information from Vaughan Constructions Pty Ltd (“Vaughan”) in relation to our client’s Works Costs,

That is entirely a matter for the Quantity Surveyor and in no way diminishes the fact of completion of our client’s obligations under cl 2.2(a)(ii) of the AfL to provide an “open book” costing of our client’s Works Costs. That was done via an inspection of Vaughan’s records by the Quantity Surveyor, completed on 23 March 2010.

2. To clarify the matters referred to in para 3 of our letter of 26 March,

372 Court Book 3345. 373 Transcript 995. 374 Court Book 3345 (emphasis in original).


the earth works and power connection costs referred to in that paragraph, are approximately $831,252 and, deleting that amount from the contribution referred to in our earlier letter, the contribution our client expects from your client will be approximately $2,941,169.00.

3. Our client’s instructions that the contribution is to be made by a lump sum cash payment to our client at the commencement of construction of the Works.

4. Our client’s instructions that, if agreement is not reached by 20 April

2010 on the amount of our client’s Works Costs and the contribution (including the manner of contribution) your client is to make towards them, our client reserves the right to terminate the AfL under cl 2.2(c).

Moreover, the issue of payment of the lump sum as raised in this letter does not, in

my view, detract from the view that this is simply part of the ongoing

communications and discussions between the parties. Woolworths submit that the

previous inclusion of $831,252 of earth works and other costs in the NES initial

“determination” was an over-inflation of Masters’ contribution to NES’s costs of

building the store.375 It is further submitted that although Mr Blake portrayed this as

being a mistake and one which was later corrected by the removal of those costs,376

Woolworths submit that this was no mistake, given the email of 2 March 2010 from

Mr Grigg to Mr Blake377 that clearly preceded the NES initial “determination”. It is

said that, at the very least, it is another example of the cavalier approach of NES to

the negotiations. Apart from a reiteration of the “determination” thesis by

Woolworths, I reject these submissions as a proper characterisation of the approach

of NES to the negotiations or, by inference, Mr Blake’s motivations. These

submissions are simply not supported by the communications and other matters to

which reference has been made.

151 Of course, on 6 April 2010, NES was unaware that Rider Hunt had provided an

estimate to Woolworths which exceeded the contribution amount NES was then

seeking to recover378 or that the Woolworths Property Committee had already

resolved to pursue an alternative site. As to the latter, by 6 April 2010, the Property

375 Defendants’ Closing Submissions (3 September 2015) [164]. 376 Transcript 266–8. 377 See above [113]. 378 Court Book 3293.


Committee had affirmed its decision of 16 March 2010 to pursue the alternative site

and to “check the legal position in relation to negotiations on site”.379 The Property

Committee had also noted that the deal would “likely fall over”.380 As no

negotiations had yet taken place between NES and Woolworths regarding the

Landlord’s Works Costs, it is submitted the reference to the deal being “likely to fall

over” can only have been a reference to the Rider Hunt estimate of 29 March 2010

materially exceeding Woolworths’ approved but undisclosed budget. Again, I

observe that Mr Champion admitted that Mr Macmillan had the authority to

terminate the Agreement for Lease in the event that the project could not be

constructed within the approved budget.381

152 On 8 April 2010, Vaughan Constructions provided to Rider Hunt a “consolidation”

of their original estimate, confirming the deduction of the site-specific items to the

value of $831,252.382 Mr McDonald could not recall whether he requested these

items be removed.383 Woolworths submit that the clear inference is that they were

removed as a result of the discussions and information exchanged between Rider

Hunt and Vaughan Constructions. I accept that that is clear and demonstrative of

the process adopted by the parties for the purposes of cl 2.2 of the Agreement for

Lease. The Woolworths submissions continue, however, with the sentence: “As Mr

Grigg had anticipated in his email of 2 March 2010 to Mr Blake, questions about

these matters were ‘obvious’.”384 If this last sentence is meant to convey a negative

inference as to the approach to negotiations of NES or Mr Blake, it is not an inference

which, in my view, is established, having regard to the communications and events

to which reference has been made. In particular, the reference to the 2 March 2010

email is not, in my view, justified in this overall context or, indeed, in the context of

that email, the contents of which have already been described.385 Of course,

questions will be raised, the process adopted by the parties for the purposes of cl 2.2

379 Court Book 3351, 3355, 3358. 380 Court Book 3348, 3357. 381 Transcript 1085. 382 Court Book 3367. See also Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [13], [25]. 383 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [26]. 384 Defendants’ Closing Submissions (3 September 2015) [165]. 385 See above [113].


of the Agreement for Lease was one of questioning and discussion.

153 On 9 April 2010, Allens Arthur Robinson, solicitors for Woolworths, responded to

the 6 April 2010 letter from Fetter Gdanski. Omitting formal parts, this letter is as

follows:386

Agreement for Lease: North East Solution Pty Ltd, Shellbelt Pty Ltd and Woolworths Limited

Property: 195 McIvor Road, Strathdale, Victoria

Thank you for your letter of 6 April 2010 and earlier today. I am instructed to respond as follows (adopting your original numbering):

1. Noted.

2. The amount that your client requires my client to contribute towards the Landlord’s Works Costs is not acceptable. I understand that my client intends to arrange a further meeting with Vaughan Constructions Pty Ltd and its Quantity Surveyor to discuss the Landlord’s Works Costs and the amount that my client will be required to contribute.

3. The payment terms proposed by your client are not acceptable. If our client agrees to contribute to the Landlord’s Works Costs, then that contribution will be made on the following terms:

(a) 95% payable within 10 business Days after the Commencement Date of the Lease; and

(b) 5% payable within 10 Business Days after the later of:

(i) expiration of the 52 week defect liability period referred to in cl 5.2(b) of the Agreement for Lease; and

(ii) the date of rectification of all deficiencies or defects in the Landlord’s Works notified in writing by the Tenant to the Landlord under cl 5.2 of the Agreement for Lease.

4. Noted. My client also reserves its right to terminate the Agreement for Lease pursuant to cl 2.2(c).

Unless otherwise defined, terms defined in the Agreement for Lease have the same meaning when used in this letter.

As Woolworths observe, the parties’ solicitors did, in both letters, reserve their

clients’ respective rights to terminate the Agreement for Lease should agreement not



be reached by 20 April 2010 in accordance with cl 2.2(c). Clearly, as these letters

indicate, the manner in which the Landlord’s Works Costs was to be paid remained

a matter for discussion between the parties.

154 As observed by NES, the letter from Allens Arthur Robinson is instructive on a

number of levels:

(a) First, it was sent at a time when the open book costing review had been

completed by Rider Hunt, who had provided Woolworths with an estimate

that exceeded that which had been sought by NES. Woolworths had been

briefed by Rider Hunt and had been provided with documents in support of

Rider Hunt’s estimate.387 As such, Woolworths was well able to identify any

issue it may have had with the Vaughan Constructions quote precisely.

Instead, Allens Arthur Robinson merely repeated that the contribution amount

was unacceptable without providing any explanation or reason and cited only

an intention to hold another meeting with Vaughan Constructions and Rider

Hunt without NES being present. NES’s submission in this respect is that

there was no genuine dispute regarding the contribution amount that had

been sought by NES—which amount was less than the Rider Hunt estimate—

and that Woolworths’ real concern was that the contribution amount, however

calculated, materially exceed their approved but undisclosed budget.

(b) Secondly, the letter was sent at a time when Woolworths had long since

agreed that they would meet any difference between the cost to construct a

Masters store and the cost to construct to a store to Bunnings specifications.388

It was well established that the purpose of the open book cost review was only

to verify the calculation of the amount of that contribution.389 It was also sent

at a time when Woolworths well knew that the cost to construct a store to a

Masters specification significantly exceeded the cost to construct a store to

Bunnings specifications and therefore the amount of the Landlord’s Works

387 Court Book 3160, 5496. 388 Court Book 1039. 389 Court Book 1039.


Costs would be significant.390 Despite this, the Allens Arthur Robinson letter

proceeded on the assumption that the payment of any contribution remained

open for negotiation.

(c) Thirdly, the form of the contribution that was to be made by Woolworths, that

is, a “lump-sum” payment toward the construction costs, had been long since

agreed—including in the Letter of Offer.391 Woolworths’ attempt to vary this

payment term for the first time, so as to enable the contribution to be made in

stages, up to more than one year after the completion of the development, was

inconsistent with what had been agreed. It may be inferred, in light of the

Property Committee’s decision to pursue an alternative site, that this

requirement was an attempt by Woolworths to bring about a difference

between the parties that it could rely on as a basis for termination of the

Agreement for Lease.

155 A further meeting took place between Rider Hunt and Vaughan Constructions on

12 April 2010 in which, among other things, Mr McDonald requested a detailed

breakdown of the items removed to the value of $831,252 and of Vaughan

Constructions’ fit-out work costs, and a site survey to permit Rider Hunt to check the

calculations.392 In their submissions with respect to this meeting, Woolworths note

that Rider Hunt had previously identified what they regarded as $455,000 in fit-out

costs that ought not to have been included in the Vaughan Constructions estimate

and say that it is reasonable to infer that this was discussed at that meeting. As

indicated previously, the significance or otherwise of this $455,000 figure is in

controversy between the parties, but in the context of the ongoing communications

and discussions between the parties for the purposes of the cl 2.2 process, it is

reasonable to expect that this matter was probably discussed. In any event, the first

two items requested by Mr McDonald were provided on 14 April 2010, together with

a detailed breakdown of all site specific costs and fit-out costs that Vaughan

Constructions had included in its quotation.393 As to other matters, the site survey

390 Transcript 1124. 391 Court Book 1041. 392 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [27]; Court Book 3384. 393 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28]; Court Book 3385–6.


was not provided and, in reviewing the further documents, Mr McDonald noted that

in addition to the $455,000 in fit-out costs previously identified, Vaughan

Constructions appeared to have included a further $123,497 in fit-out costs.394

Additionally, Mr McDonald noted the presence of earthworks and retaining wall

costs of $358,806 and $364,469 respectively.395 A further meeting was held on 15

April 2010.396

156 The detailed bill of costs provided by Vaughan Constructions did not include the

$455,000 of fit-out costs that had been included in the generic “extra over” list which

Vaughan Constructions had provided as part of the generic cost comparison process.

This was to be expected as the quotation for the Bendigo store was not supposed to

include items to be paid for by the landlord, NES, whereas the generic cost

comparison was intended to identify all items to be included in a Masters store

regardless of who paid these (the costs were merely separately identified if they

were to be paid by other areas within Woolworths). The detailed bill of costs

provided by Vaughan Constructions did include site specific costs for earthworks to

level the site and a retaining wall to support the site perimeter as well as $123,497 for

certain fit-out works.397 Although, by that stage, the site specific costs had already

been removed from Vaughan Constructions’ revised quotation.398 On 15 April 2010,

Vaughan Constructions confirmed that its revised assessment of the Landlord’s

Works Costs had been amended to remove the site specific costs.399

157 The 15 April 2010 meeting was the last meeting before the 22 April 2010 meeting and

thus represented something in the nature of the final step in the process thus far,

before what proved to be the critical meeting on 22 April 2010. As to the process

thus far, Woolworths submit:400

While progress had been made by this stage to identify the basis for Vaughan

394 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28(a)]. 395 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28(b)]–[28(c)]. 396 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [29]. 397 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [28(a)]. 398 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [25]; Court Book 3367. 399 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [29]; Court Book 3393. 400 Defendants’ Closing Submissions (3 September 2015) [171]–[173] (emphasis and citations omitted).


Constructions’ Landlord’s Works Costs figure, to identify items that should not have formed part of the Landlord’s Works Costs, and towards identifying the difference in cost between a Masters store and a Bunnings store, Mr McDonald did not consider that the process had run its course.401 Further, as noted above, notwithstanding the information provided by Vaughan Constructions aimed at identifying the cost basis for specific items in which the Masters and Bunnings briefs differed, Vaughan Constructions had still not, at this time, provided their complete open book costing for the Landlord’s Works Costs.

The disconnect between the obvious fact that the process had not completed (observable from the contemporaneous documents), and Mr Blake’s demands at the time and subsequent complaints in this litigation, remains unexplained. Of course, the representatives of Vaughan Constructions could have shed light on this disconnect by giving evidence at the trial, but Mr Blake tellingly chose not to call them.

In any event, notwithstanding that the process between Rider Hunt and Vaughan Constructions had yet to finish and, therefore, the parties did not know the quantum of the difference as to the Landlord’s Works Costs or tenant’s contribution, they agreed to meet to “resolve” their differences. The fact Woolworths did so, and indeed were the one pressing for such a meeting, itself demonstrates that Woolworths were plainly eager to proceed with the Strathdale site. Mr Macmillan said that the purpose of the meeting that then followed was to “talk about the latest letter which I think was the 6th or 9th of April and talk about the LWC”.402

These submissions are consistent with the initial thesis advanced by Woolworths

with respect to the requirements of the process under cl 2.2 of the Agreement for

Lease for which they contend. As indicated previously, that is not a contention

which I accept, and neither do I accept that it can be said that the parties had not

undertaken the process for the purposes of cl 2.2 thus far in the absence of informed

discussions between experts. Consequently, it is simply disingenuous to suggest

that by 15 April 2010, Vaughan Constructions and, by inference, NES had not

participated fully in an open book costing process for the purpose of calculating the

Landlord’s Works Costs. The issue of whether NES should or should not have

subpoenaed Vaughan Constructions to give evidence, and whether any adverse

inference should be drawn as a result of Vaughan Constructions not being called, is

not a matter which is relevant to the outcome of these proceedings, as is indicated in

these reasons.403 Moreover, as indicated at the outset, the contemporaneous

401 Transcript 1326–8. 402 Transcript 589. 403 Cf Defendants’ Closing Submissions (3 September 2015) [218]–[219].


documentation—which is quite extensive—provides a comprehensive and reliable

picture in any event.

The 22 April 2010 meeting

158 The provisions of cl 2.2 of the Agreement for Lease provided for a right of

termination in either party in the event that agreement could not be reached on the

Landlord’s Works Costs or the amount that the tenant must contribute towards the

Landlord’s Works Costs, if anything, and the terms and conditions on which this

contribution will be made by the later of 20 April 2010 and the date six weeks after

the date of receipt by the tenant of notice of the Landlord’s Works Costs, or such

later date to which the parties agree. In the context of these provisions, it is to be

observed that the first issue raised by Woolworths with respect to this meeting is its

scheduling. Thus, it is submitted:404

Importantly, it was Mr Macmillan, not Mr Blake, who tried to arrange for the meeting to take place before 20 April 2010,405 but this was seemingly not possible for Mr Blake who was apparently unavailable because of the appointment of a new “General Manager”,406 and so the parties agreed to meet on 22 April. The lack of urgency on Mr Blake’s part in trying to organise a meeting before 20 April is striking and contextually very important. As the time for negotiations was due to expire on the 20 April 2010, it was open to either party to have terminated the contract on 20 April without agreeing to meet later. Mr Blake was not able to explain why the defendants would agree to that, if it was their intention to terminate the Agreement for Lease.407 The defendants could have done so from 20 April, but did not do so.

20 April 2010 fell on a Tuesday and 22 April 2010 on a Thursday. The reason given

for the delay of two business days on Mr Blake’s part was that he had then very

recently engaged a new General Manager for his group of companies.408 In my view,

this was not an unreasonable request for Mr Blake to make, and if two business days

was a matter of concern to Woolworths, that could have been made very clear to

Mr Blake at the time. It might be said that termination of the Agreement for Lease

was in the parties’ minds having regard to the reservation in this respect in the then

404 Defendants’ Closing Submissions (3 September 2015) [174]. 405 As this was the termination date under the Agreement for Lease. 406 Court Book 3394. 407 Transcript 301. 408 Court Book 3396. See also Transcript 300–1.


recent letters from Fetter Gdanski and Allens Arthur Robinson, but in the context of

communications and discussions between the parties and the experts, I am of the

view that the formal reservation of rights is of no significance in relation to the

timing of this meeting. Additionally, one might have then assumed that all parties

were seriously seeking to agree a position on Landlord’s Works Costs and the

contribution, if any, to those costs by the tenant. Consequently, the inference sought

to be drawn in the Woolworths submissions set out above, to the extent that it seeks

to promote the view that NES was cavalier or not serious in its negotiations, is not, in

my view, justified.

159 Shortly before the 22 April 2010 meeting, Rider Hunt provided Mr Macmillan, at his

request, with a further report in relation to the Landlord’s Works Costs.

Mr McDonald had requested a summary of Rider Hunt’s review of the Landlord’s

Works Costs and where Rider Hunt had reached with Vaughan Constructions as at

that date. Mr McDonald’s evidence is that he was still carrying out his assessment at

that time, and he said that he would try to get it to Mr Macmillan prior to the

meeting that was arranged for 22 April 2010.409 Mr Macmillan’s evidence is that he

received Mr McDonald’s assessment by email only shortly before the meeting was to

commence and was not able to read the memorandum that was attached to the

email.410 Mr Macmillan says that he recalls speaking with Mr McDonald by phone

and understood that it was Mr McDonald’s view that the Masters contribution to the

Landlord’s Works Costs should be no more than around $1.5 million.411

Mr Macmillan also said that he did not consider the process being followed by Rider

Hunt and Vaughan Constructions to be complete, and that his understanding was

that they were still working through the differences between the two design briefs.412

With respect to this report, NES submits that the contribution amount specified of

$1,513,413 would have been within Woolworths’ approved budget; although it

included more than $340,000 in variations, and adjustments of nearly $900,000, many

409 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [102]; Transcript 590, 844. 410 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [103]; Transcript 845. 411 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [105]. 412 Transcript 907–8, 975.


of which, on closer inspection, are, it says, unsustainable.413

160 Present at the meeting were Mr Macmillan, Mr Graves of Allens Arthur Robinson,

solicitors for Woolworths, Mr Blake, and Mr Davis and Mr Fetter of Fetter Gdanski,

solicitors for NES. Each gave evidence of their recollections of that meeting. Their

recollections varied, which is not surprising, having regard to the meeting having

been held over five and a half years ago. In view of the importance of this meeting,

it is apposite at this stage to reiterate the warning of Lewison J with respect to

witness recollections, reaffirming the position that the most reliable evidentiary

record is likely to be contemporaneous documents.414 Woolworths provide a

detailed summary with respect to the evidence of the discussions at that meeting, a

summary which it is helpful to set out in full:415

Mr Blake

(a) Mr Blake’s evidence as to this meeting had certain hallmarks of being reconstructed to fit or present NES’s case, rather than a neutral account of what he recalled. For example, Mr Blake held to the position that the only response he got from either Mr Graves or Mr Macmillan at the meeting about the amount of the Landlord’s Works Costs was that they were too high.416 He denied there was any discussion about whether the Vaughan Constructions Landlord’s Works Costs figure was correctly based on a benched and level site, and said he could not recall any discussion about whether the Vaughan Constructions price assumed (as it should) that the site was connected to services or whether it included full height pre-cast panels.417 As the file notes of Mr Graves and Mr Davis418 and the evidence of Mr Graves make clear, these matters were discussed and more was said about the contribution amount than it was simply “too high”.

(b) Mr Blake also said that the defendants’ position on the manner of payment was “not negotiable”, and denied there was any discussion regarding alternative ways in which the contribution could be paid.419 Again, the evidence of Mr Graves and Mr Macmillan (discussed below), and the file notes of Mr Fetter,420 Mr Graves421 and Mr Davis422

413 Court Book 4745. See also Transcript 428–9, 735. 414 Foodco Uk LLP v Henry Boot Developments Ltd [2010] EWHC 358 (Ch), [3]–[5]. See above [11]–[12]. 415 Defendants’ Closing Submissions (3 September 2015) [176] (emphasis omitted). 416 Transcript 155. 417 Transcript 291–2. 418 Court Book 3416. 419 Transcript 292–5. 420 Court Book 3407–10. 421 Court Book 3910–4004. 422 Court Book 3418.


make it clear that these matters were discussed. Even though Mr Blake said he did not recall some of the matters put to him, his response that “I would be happy to deny it”423 was telling. When Mr Davis’ notes were put to Mr Blake that recorded the discussion regarding progress payments, he then accepted that something like that was discussed.424 Similarly, as also discussed below, Mr Davis and Mr Graves recalled discussion regarding the possibility of NES becoming insolvent in the context of the discussion as to the manner of payment, while Mr Blake denied such discussion took place.425

(c) Mr Blake gave evidence during trial that it was his position that the contribution had to be made during the construction period,426 but that he would have been “happy to agree” to progress payments,427 and was prepared to negotiate this position at the 22 April meeting.428 By contrast, as discussed below, the evidence of Mr Graves is that Mr Blake sought the entire contribution “up front” and described this as “non-negotiable”.

(d) Ultimately, Mr Blake accepted that Woolworths’ position in respect of the manner of payment was perfectly reasonable,429 and voiced no complaint about the discussion at the meeting in respect of that matter.430

(e) Mr Blake did accept, however, that when the discussion on the Landlord’s Works Costs appeared, to him, to be getting nowhere, he offered the defendants the right to purchase the options for the site.431 He said that the response was that the defendants would require a couple of weeks to consider the offer and would come back to him on 4 May 2010.432

(f) Mr Blake also accepted that at the 22 April 2010 meeting he said that either party could terminate the Agreement for Lease that day.433

(g) Finally, Mr Blake accepted that after the meeting on 22 April 2010, nothing went any further with the Agreement for Lease—“The deal was done, it was cancelled, it was all over”.434

Mr Davis

(h) The evidence given by Mr Davis at the trial closely followed his file notes of the meeting. As such, Mr Davis’ evidence at trial was somewhat different from that set out in his outline of evidence (which like other of the NES outlines appeared to have been prepared to

423 Transcript 294. 424 Transcript 297. 425 Transcript 293–4. 426 Transcript 294. 427 Transcript 297. 428 Transcript 287. 429 Transcript 298–9. 430 Transcript 299–300. 431 Transcript 156. 432 Transcript 156. 433 Transcript 293. 434 Transcript 303.


present NES’s case as set out in the then pleadings, rather than outline the evidence of the witness in a neutral fashion).

(i) It was apparent, however, that Mr Davis in fact had little actual recollection of the meeting. In reality, his evidence was based almost entirely on his present interpretation of what was contained in his notes.435 However, he said that:

(i) he had a “fairly clear memory of him [Mr Macmillan] saying, ‘What we had in mind was $1 million’”;436

(ii) he recalled Mr Blake going through the manner in which the Vaughan Constructions quote could be reduced “and that was discussed to some extent”;437

(iii) he recalled quite a bit of discussion about options for the manner of payment and discussion regarding the timing of any payments;438 and

(iv) in this context, he recalled concerns about the possible insolvency of NES being raised.439

(j) Mr Davis also made an important concession when asked if he recalled Mr Blake saying to him prior to the meeting that one possibility was that he might sell the site to Bunnings. Mr Davis responded: “No I can't recall that. My understanding was he was expecting—hoping at least—that it would end up being bought by Woolworths”.440 While Mr Davis then immediately tried to correct that answer by suggesting that “that was in the meeting”, it is submitted that his initial answer was the correct one.

(k) It was also confirmed by Mr Davis that no negotiations regarding the outstanding matters under the Agreement for Lease occurred after 22 April 2010, and no follow up was made by NES in respect of those matters.441 While Mr Davis suggested that was because “the ball was in [the defendants’] court”, if NES had still been interested in pursuing the Agreement for Lease, it is submitted that it is inconceivable that either Fetter Gdanski or Mr Blake himself would not have pressed the defendants for a response. Mr Blake had certainly demonstrated his previous preparedness in this regard.442

Mr Fetter

(l) It is submitted that the Court will derive little assistance from Mr Fetter’s file notes.443 The handwritten note is vague and incomplete,

435 See, eg, the question of who made the suggestion that matters might come off the Bunnings

specification: Transcript 463–4. 436 Transcript 478. Cf Court Book 3416. 437 Transcript 479. 438 Transcript 479–81. 439 Transcript 480. 440 Transcript 484. 441 Transcript 489. 442 As evidenced by the requests for updates as to progress given emphasis by NES, discussed above. 443 Court Book 3407.


and the typed notes are plainly not contemporaneous.444 The defendants objected to the production of the typed notes445 and maintain that objection.446

(m) When asked about matters recorded in his handwritten file note, Mr Fetter’s consistent reply was that he could not recall what was discussed about those matters, other than recalling that there was discussion about the manner of payment of any contribution447 and Mr Blake saying “why don’t you buy the site”, to which the response was that the defendants would need a number of days to consider it.448

(n) Mr Fetter could not recall there being any negotiations in respect of the Landlord’s Works Costs following the meeting.449

Mr Macmillan

(o) It was put to Mr Macmillan that he could have adjourned the meeting to allow himself an opportunity to consider the memorandum from Mr McDonald. Mr Macmillan said he did not, as there were a number of other items to be progressed at the meeting.450 Mr Macmillan said, however, that given how the meeting progressed it never became necessary to report on where things were at between Rider Hunt and Vaughan Constructions or to consider such an adjournment as, effectively, Mr Blake forestalled a need for discussion on the amount of the Landlord’s Works Costs by saying that he “needed” $2.94 million451—“Brendan advised that to proceed he needed $2.94 million”.452

(p) Mr Macmillan said that Mr Blake stated at the meeting that it was NES’s final position that Masters should contribute $2.94 million453 and that it was “not negotiable”.454 Mr Macmillan said he was not

444 Transcript 323. 445 Transcript 326. 446 The Defendants objected to the production of the typed notes on several grounds. First, the notes are

not contemporaneous notes of the meeting and were prepared only in the year prior to Mr Fetter giving evidence on 20 May 2015: Transcript 323. The lapse of time has the effect that any weight that could be given to Mr Fetter’s notes is significantly reduced. Second, the notes were not prepared by Mr Fetter himself, but were prepared by NES’s former counsel, Dr Hanak, in an interview with Mr Fetter some time before trial: Transcript 323. Finally, and most importantly, it is clear that these notes are not mere transcriptions of Mr Fetter’s file notes, but contain opinions and inferences from the meeting, as well as statements that address the evidence given by the Defendants’ witnesses. One example of this includes the statement' “I therefore refute the statement that it was obvious therefore that a counter offer based on the amount determined by [Rider Hunt] and the payment terms outlined in the letter of 9 April 2010 would not be agreed and no agreement could or would be reached”: Court Book 3409. The Defendants submit that it is inappropriate to rely on such notes as an objective account of what took place at the 22 April 2010 meeting.

447 Transcript 328–9. 448 Transcript 330. 449 Transcript 332. 450 Transcript 846, 850, 887–8. 451 Transcript 845–8. 452 Transcript 885, 887. 453 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [107(a)]. 454 Transcript 848.


given an opportunity to negotiate that issue,455 and that the discussion shortly moved on.456 That is, before there was the opportunity to return to the amount of the tenant's contribution, Mr Blake made his offer to sell the options for the site to Woolworths.457 As Mr Macmillan said, the discussion “moved fairly and squarely on [to] ‘Let’s have a look at selling the site’”.458

(q) Mr Macmillan recalled discussing the manner that any payment might be made, including Woolworths’ usual practice of only making such a contribution at the commencement of the lease given concerns that the builder may go broke.459

(r) Mr Macmillan accepted that he said the tenant's contribution sought by NES was “too high” but said that he did so because Mr Blake had said that the amount NES wanted ($2.94 million) was “not negotiable”.460

(s) While Mr Macmillan accepted that Mr Blake spoke about items that could be taken out of the Masters specification to reduce the cost to Masters,461 this is plainly different from being willing to negotiate the amounts under the Landlord’s Works Costs.

(t) Mr Macmillan accepted that it would have been reasonable to mention the $1.5 million figure given to him by Mr McDonald,462 and that it would also have been reasonable to identify the differences as to the Landlord’s Works Costs and the tenant’s contribution, why Woolworths considered the Landlord’s Works Costs estimate to be too high, and what Woolworths’ expectations were.463 As Mr Macmillan explained in re-examination, however, it would have been reasonable to do those things once Woolworths had gone through all of the information with Rider Hunt and the discussions with Vaughan Constructions were complete.464 That is, crucially, when Masters had received NES’s open book costing and had properly identified the differences to be resolved.

(u) Mr Macmillan rejected the suggestions that he did not table at the meeting, or put to Mr Blake, that Rider Hunt had assessed the tenant’s contribution to be $1.5 million because it would have exposed Woolworths to the risk of Mr Blake accepting that sum or seeking to have further negotiations.465

(v) Mr Macmillan also rejected the suggestion that he referred to a “maximum” contribution of $1 million at that meeting in order to kill

455 Transcript 848. 456 Transcript 849, 851. 457 Transcript 852. 458 Transcript 852. 459 Transcript 591. 460 Transcript 848–9. 461 Transcript 888. 462 Transcript 854. 463 Transcript 959. 464 Transcript 1008–9. 465 Transcript 850.


the negotiation.466 He said he could have said that figure to start a negotiation.467 It is noted that, despite Mr Blake now saying that he would have been prepared to reduce his offer by $615,000,468 there is no evidence from anyone attending this meeting that Mr Blake made any attempt to negotiate somewhere between his figure of $2.9 million and Mr Macmillan’s “expectation” of $1 million.469 Indeed, the reference to the $1 million figure only became apparent to the Defendants when NES finally produced the file note of Mr Davis, which should have been discovered as part of the normal discovery processes.

(w) Mr Macmillan was questioned at some length about the comment recorded in Mr Davis’ file note that: “They could deduct 500k from Bunnings spec”.470 While Mr Macmillan accepted he could have said that (although he could not recall doing so), it makes no sense for him to have suggested that Woolworths would have deducted anything from the Bunnings spec as to do so would increase the tenant’s contribution. Mr Macmillan confirmed in re-examination that he did not recall what he suggested the $500,000 might have been deducted from.471

(x) Finally, Mr Macmillan said that when he left the meeting on 22 April 2010, as far as he was concerned the Agreement for Lease was dead.472

Mr Graves

(y) Mr Graves’ account of what he recalled from the meeting was, perhaps, the most detailed and clearest, and covered:

(i) his recollection of meeting with Mr Macmillan prior to the meeting at Fetter Gdanski. While this differed from Mr Macmillan’s recollection in some minor and unsurprising details (given the events occurred over five years ago), their evidence was consistent as to the relevant matters—namely, that Mr Macmillan did not receive the email from Mr McDonald until shortly before entering the meeting at Fetter Gdanski, did not have an opportunity to review the attachment to Mr McDonald’s email, but that he understood that Mr McDonald said that the difference should be about

466 Transcript 855. 467 Transcript 855. Mr Blake gave examples in his oral testimony of the same negotiating strategy,

including in relation to the negotiations as to the rental amount for the Strathdale site: Transcript 169. 468 Outline of Brendan Edward Blake (6 March 2015) [232]. 469 The Defendants again note that NES ought to be fixed with Vaughan Constructions’ knowledge

obtained through the process with Rider Hunt. This includes that Woolworths had advice from Rider Hunt that the difference in cost between a generic Masters store of 13,465 square metres and an equivalent Bunnings store ought to be $1.176 million. Even apart, therefore, from the evidence that Mr Macmillan said at the meeting that Woolworths’ expectation was that the difference should be approximately $1 million, [the Defendants submit that] the Court should find that NES already knew this, or are otherwise deemed to have known it.

470 Court Book 3411–7; Transcript 857–9. 471 Transcript 985. 472 Transcript 928, 954.


$1.5 million;473

(ii) that Mr Blake never offered an alternative figure for the tenant’s contribution, sticking with the figure of $2.9 million set out in their 6 April 2010 letter;474

(iii) that the discussion covered matters of detail regarding the Landlord’s Works Costs and the amount of the tenant’s contribution, with Mr Macmillan raising a number of queries regarding what had been included in the Vaughan Constructions estimate of the former and the estimate of the cost of the Bunnings brief used to calculate the latter, to which Mr Blake responded.475 Mr Graves recalled the discussion being line by line for some items,476 but not in a way that could lead to a specific number as Mr Macmillan didn’t have the information necessary to do so.477 Mr Graves said these matters were raised by Mr Macmillan as an example of why Masters had concerns that the Vaughan Constructions costs were not correct, therefore raising the possibility that there were other errors;478

(iv) that there was considerable discussion regarding the manner of payment of any tenant's contribution, which included concerns raised about the solvency of NES;479

(v) Mr Blake suggesting that Woolworths lean on Vaughan Constructions to get it a lower price or help him find another builder;480

(vi) Mr Blake then offering to sell the site to Woolworths, which involved considerable discussion about the options contracts (through Mr Fetter);481 and

(vii) the parties agreeing to extend the expiration date in the agreement to 4 May 2010.482

(z) With reference to Mr Davis’ file note, Mr Graves recalled:483

(i) Mr Macmillan saying that his expectations were around $1 million;484

473 Transcript 1045–7. 474 Transcript 1031–2, 1054. 475 Transcript 1026–8. See also Transcript 1053–4. 476 Transcript 1033. 477 Transcript 1055. 478 Transcript 1057–60. It should also be noted that there was, quite possibly, some confusion as to what

was being discussed at this time: see Transcript 1065–9; Court Book 3416. 479 Transcript 1025–6, 1028–9. 480 Transcript 1030. 481 Transcript 1030–1. 482 Transcript 1035. 483 Court Book 3411. 484 Transcript 1036–7.


(ii) that the note: “They could deduct 500k from Bunnings spec”485 was not an accurate reflection of the conversation on the topic of the Troons quote;486

(iii) that both parties spoke about termination;487 and

(iv) that Mr Blake said: “Do we walk away today”, to which Mr Graves responded that they should keep the agreement alive for another 7 days.488

161 In my view, the critical points or issues arising from this evidence, somewhat diverse

at times as it is, is provided by the following submissions of NES:489

While the accounts of those present differ as to what happened at that meeting, it is common ground that:

(a) NES stated the position that was contained in its letter of 6 April 2010.490

(b) Mr Graves and Mr Macmillan restated Woolworths’ position that the Landlord’s Works Costs contribution sought by NES was too high having regard to the Rider Hunt calculations.491 Those calculations were not disclosed.492

(c) Mr Graves and Mr Macmillan said that any contribution that was to be paid by Masters would not be paid in a lump sum and would be paid after commencement of the lease and a defects rectification period.493 Mr Blake said that NES was looking for a lump sum contribution in accordance with the Letter of Offer to be paid before construction, but would be open to negotiate some other arrangement.494

(d) Woolworths did not provide or make available the reports it had obtained from Rider Hunt or any other information that would have reasonably enabled the parties to identify, with any precision, or to resolve, the differences that Woolworths had in relation to the NES estimate.495 The parties were therefore unable to, and did not, resolve any of their differences in relation to the Landlord's Works Costs or agree on a contribution figure.

(e) Mr Blake, on behalf of NES, offered to sell the options to purchase the Bendigo site to Woolworths, and Mr Graves and Mr Macmillan said

485 Court Book 3417; Transcript 857–9. 486 Transcript 1037. 487 Transcript 1037–8. 488 Transcript 1039–40. 489 Plaintiff’s Closing Submissions (3 September 2015) [127]. 490 Court Book 3343; Transcript 589. 491 Transcript 91. 492 Transcript 155, 462. 493 Transcript 465, 590, 1025. 494 Transcript 155–6, 287. 495 Transcript 245, 1056.


they would take a few weeks to consider that offer.496

In my view, this summary is substantially consistent with the account of Mr Graves

and others to which reference is made and does, in the present context, identify the

critical aspects of and issues arising from this 22 April 2010 meeting.

162 Of particular and critical significance, in my view, particularly having regard to the

provisions of cl 2.2 of the Agreement for Lease, is that Mr Macmillan had failed to

read the Rider Hunt further report in relation to the Landlord’s Works Costs which

was emailed to him shortly before the 22 April 2010 meeting. Having regard to the

preceding communications and discussions between the parties and their works

costs assessors, it would be absolutely critical to read and understand this

assessment prior to discussions at the 22 April 2010 meeting. Not having done so it

was all the more surprising for Mr Macmillan to express the view at that meeting

that his, namely Woolworths’, expectations with respect to the Landlord’s Works

Costs were around $1 million. Mr Blake is criticised for “sticking with the figure of

$2.9 million set out in the 6 April 2010 letter”, but this was a figure that had been

raised in earlier communications, namely a letter of 6 April 2010, in relation to which

there had been further discussions but no resolution prior to the 22 April 2010

meeting. Whichever version of the evidence, or combination of versions, of the

totality of discussions at the 22 April 2010 meeting, it is clear, in my view, that the

parties simply never engaged in relation to the issue of the Landlord’s Works Costs.

At least it may be said with respect to Mr Blake that NES had communicated a

position prior to the meeting, whereas it appears that this was not the case with

Woolworths, having regard to the evidence of Mr Macmillan saying that his

expectations were around $1 million for Landlord’s Works Costs. Indeed, it must be

said that, had this always been the expectation of Woolworths, it would have been

most helpful to the process conducted for the purposes of cl 2.2 of the Agreement for

Lease if this had been made clear at the start of discussions. It is not, in my view,

indicative of a willingness on the part of Woolworths to enter into serious further

discussions with respect to the Landlord’s Works Costs, particularly having regard

496 Transcript 245, 465, 592–3, 2030–1.


to Mr Macmillan’s failure to read the latest Rider Hunt comparative assessment

provided to him shortly prior to the meeting.

163 Woolworths contend that, contrary to the submissions of NES on this point, any

suggestion that the “non-provision” of the Rider Hunt further report provided on

22 April 2010 at the meeting that day was indicative of absence of good faith on their

part should be rejected.497 Woolworths’ submissions on this point are, having regard

to the context of the process the parties were undertaking for the purposes of cl 2.2 of

the Agreement for Lease, an attempt to rationalise and justify a failure on the part of

Woolworths to provide the further report to NES for discussion and evaluation

without delay. Accordingly, this contention is not accepted. The same applies to the

contentions by Woolworths with respect to the complaint by NES that they failed to

disclose that it had a “budget” of $1.7 million in relation to the Landlord’s Works

Costs.498

164 In contrast to the position which, in my view, follows from the evidence and

submissions of the parties as to what occurred or did not occur at the 22 April 2010

meeting, Woolworths submit that the following findings should be made by the

Court from the various accounts of this meeting:499

It is submitted that the Court can make the following findings from the various accounts of the meeting of 22 April 2010:

(a) Mr Macmillan attended the meeting with the understanding that the process between Rider Hunt and Vaughan Constructions had not yet concluded. That is, he did not have final advice from Rider Hunt as to what the difference would be between the tenant's contribution sought by NES and Rider Hunt’s view of what it should be.

(b) Nevertheless, immediately prior to entering the meeting Mr Macmillan received advice from Rider Hunt that the difference should be no more than around $1.5 million. Mr Macmillan did not have the opportunity prior to the meeting to review the email and attachment by which that advice was given.

(c) At the meeting, Mr Blake said that NES needed $2.9 million as the tenant’s contribution. This was presented as a non-negotiable figure and there was no negotiation of this figure, although there was

497 Defendants’ Closing Submissions (3 September 2015) [240]–[246]. 498 Defendants’ Closing Submissions (3 September 2015) [247]–[251]. 499 Defendants’ Closing Submissions (3 September 2015) [177].


discussion about ways in which the figure might be reduced by taking things out of the Masters’ scope.

(d) There was also discussion about what had or had not been included in the estimates for an alternative Bunnings store, but that the discussion on these matters was confused and, possibly, at cross-purposes (at least in the case of Mr Davis).

(e) There was considerable discussion regarding the manner in which any contribution might be paid, with various options being put on the table.

(f) There was, however, no agreement as to either the tenant’s contribution or the manner of payment.

(g) Mr Blake offered to sell the site to Woolworths and, as a result, further discussion on the tenant’s contribution or manner in which it should be paid ceased, and the parties agreed to keep the Agreement for Lease alive for a period of time in order to consider that offer.

(h) It was also agreed that if, by 6 May 2010, Woolworths had not decided to purchase the options, the Agreement for Lease would be at an end and either party could terminate it.

These submissions do not, however, address the issues to which I have referred,

which, in my view, flow out of the evidence of this meeting. In particular, it is no

answer, in my view, to say that Mr Macmillan did not have the opportunity prior to

the meeting to review the email and attachment containing the further advice from

Rider Hunt. Clearly, the contents of that further advice would have to be anticipated

as being important for the discussions which were to take place at the meeting, and

it is not credible to think that, in a project of this significance, a party seriously

undertaking discussions of that type would not ensure that its representatives had

read, understood and considered further advice of this nature. In the context and

having regard to the evidence in relation to this meeting and the preceding

discussions and communications between the parties, I am of the view that it is more

probable than not that Mr Blake’s reference to NES needing $2.9 million as the

tenant’s contribution was a negotiating position, and a position which may have

appeared more intransigent in light of Mr Macmillan’s announcement at the meeting

that Woolworths were looking at a Landlord’s Works Cost around $1 million.

Having regard to the apparent lack of constructive discussion with respect to

Landlord’s Works Costs, it is, in my view, unsurprising that there was further


discussion in relation to other possibilities with respect to the site, including whether

Woolworths would be interested in purchasing the options to acquire the freehold

for the Strathdale site. Accordingly, I am of the view that nothing flows from this

issue being raised or discussions taking place in relation to it; certainly, nothing of

the character of estoppel, abandonment or waiver on the part of NES.500

165 In any event, whether the Agreement for Lease was only kept alive to permit the

consideration of the purchase of the Strathdale site, it is significant that there were

no steps taken by either party to resolve the outstanding issues under the Agreement

for Lease or to arrange any further meetings between Vaughan Constructions and

Rider Hunt or, indeed, to arrange any further discussion or meeting regarding those

matters between the parties after that date.

Events after 22 April 2010

166 Following the 22 April 2010 meeting, Mr Macmillan spoke to Mr Champion and told

him that the deal had changed and that they were now looking at buying the site,

rather than leasing it.501 Mr Macmillan’s evidence is that, after returning to his office

at Mulgrave, he looked at the information that he had available to assess whether to

buy the Strathdale site.502 He says, however, that he quickly came to the conclusion

that it was not in the interests of Woolworths to purchase the site.503 He said that the

primary reasons for this decision were that the “numbers did not stack up” as

Mr Blake had paid too much money for the options to purchase the land comprising

the site and that there may well be planning difficulties, notwithstanding the

ministerial process that had been set up.504 Mr Macmillan says that he reached this

decision over the course of 22 and 23 April 2010, but did not immediately move to

terminate the Agreement for Lease as he wanted to consider what the other options

were first so he could report back to the Property Committee.505 There is no doubt

500 Cf Defendants’ Closing Submissions (3 September 2015) [297]–[300]; Transcript 1485–6. 501 Transcript 595. 502 Transcript 595–6. 503 Transcript 928–9. 504 Transcript 596. 505 Transcript 597.


that there was a suggestion by NES that the Strathdale site be purchased by

Woolworths and that it is made clear in an email dated 22 April 2010 from Mr Davis

of Fetter Gdanski to Mr Graves of Allens Arthur Robinson.506 It is significant, in my

view, in the present context, that Woolworths then proceeded to consider

alternatives to the Strathdale site, not merely other sites, but other options, to

provide a Masters store in Bendigo, rather than engage further with respect to the

Landlord’s Works Costs.

167 The evidence was, as discussed previously, that at the 22 April 2010 meeting,

Mr Macmillan had said that after the $2.94 million contribution amount had been

sought by NES, there had been discussions with Vaughan Constructions. As a result

of those discussions, Mr Macmillan said that Woolworths “now think the

contribution should be under $1 million”.507 It does appear, though, to be clear from

Mr McDonald’s evidence that there had been no such discussions with Vaughan

Constructions after the $2.94 million amount had been formulated, let alone any

discussions that would have resulted in a contribution of less than $1 million to

Landlord’s Works Costs. This figure is nowhere near any amount that had ever been

provided to Woolworths by Rider Hunt, even in the 22 April 2010 email,508 and the

figure was roughly one third of the estimate that had been provided by Vaughan

Constructions and agreed by Rider Hunt at the conclusion of the open book

process.509 Thus, it is said by NES that it was unreasonable for Woolworths to reject

the Vaughan Constructions estimate without providing any meaningful explanation

for that rejection or identifying points of difference that could be negotiated.

Woolworths’ approach, NES contends, was particularly anomalous in circumstances

where Vaughan Constructions was Woolworths’ preferred construction company

and had successfully tendered for the contracts to build the first six Masters stores in

Victoria in Braybrook, Burnside, Coolaroo, South Morang, Dandenong and

506 Court Book 3400. 507 Court Book 3407; Transcript 963. 508 Court Book 4231. 509 Court Book 3293, 3393, 4744; Transcript 103–7; Outline of Evidence of Ewen Kenneth McDonald (27

February 2015) [29].


Keysborough.510 Thus, in the circumstances, NES submits that it would have been

reasonable for Woolworths to provide some explanation for its “out of hand”

rejection of the Vaughan Constructions quote as being “too high” or “unacceptable”.

Assuming there was some genuine disagreement regarding the calculations

prepared by Vaughan Constructions, I accept that, as submitted by NES, a

reasonable person, acting in good faith, with a genuine desire to identify and resolve

any differences would surely disclose what those differences were. In this respect,

Mr Macmillan admitted this, but said that Woolworths was “still going through [the

process]” of identifying the differences.511

Plaintiff’s allegations of breach

168 On 6 May 2010, Woolworths terminated the Agreement for Lease by letter of that

date addressed to Mr Blake of NES. The letter critically stated:512

Further to our recent discussions, in accordance with clause 2.3(c) of the Agreement for Lease … Shellbelt Pty Ltd hereby terminates the Agreement with immediate effect.

This was in circumstances where no agreement had been reached for the purposes of

those provisions of the Agreement for Lease.

169 In this respect, NES submits that the natural inference to be drawn from the events

leading up to the termination by Woolworths of the Agreement for Lease—including

as set out in Woolworths’ own contemporaneous correspondence, namely the letter

to which reference has just been made—is that the “real” reason for Woolworths’

termination of the Agreement for Lease was not an inability on the part of NES and

Woolworths, acting in good faith and reasonably, to resolve any differences they

may have had in relation to the Landlord’s Works Costs. Rather, NES contends that

the Court should find that the “real” reason or reasons for the decision by

Woolworths to terminate the Agreement for Lease were:

(a) the inability of Woolworths to bring the Landlord’s Works Costs and the

510 Court Book 4694–5. 511 Transcript 959, 963. 512 Court Book 3442.


tenant’s contribution to those costs within Woolworths’ approved but

undisclosed budget;

(b) the perceived lack of support on the part of the Council;

(c) the perceived financial difficulties of NES; and

(d) critically, a decision made by the Property Committee to pursue the

strategically important Hume & Iser Home Timber & Hardware store, which

was a key customer of Danks and which both Bunnings and Danks had been

pursuing.

These were not, NES contends, grounds upon which Woolworths was free to

terminate the Agreement for Lease.

170 Moreover, NES contends that Woolworths’ reliance on cl 2.2 of the Agreement for

Lease to terminate was, and is, false as is evident from the handwritten notes of Mr

Champion, the Woolworths executive responsible for the Masters rollout, along with

Mr O’Brien, made on the day before the termination, in which Mr Champion

states:513

Agreement to lease the currently approved site expected to fall over today. The grounds are that the parties have not reached agreement on cost of building.

Reality is that Council will not support that site. Landlord offered to sell for $6.3m ~ 500k margin. We have politely declined.

The Hume and Iser site is the large & successful Home Hardware—very interested in selling to us …

NES submits that there can be no doubt, in its context, that the reference by Mr

Champion to the “Reality” in his notes was intended to, and does, distinguish

between the “real” reason for Woolworths’ termination of the Agreement for

Lease—namely the opposition of the Council and the pursuit of the Hume & Iser

store—and the reason Woolworths now seeks to rely upon. NES further observes

that Mr Champion makes no reference to this note in his Outline of Evidence and

513 Court Book 4046 (Plaintiff’s emphasis).


that his oral evidence to the effect that this statement had the opposite meaning to its

plain ordinary meaning lacks credibility and should not be accepted.

171 In view of the significance which NES, at least, placed upon this handwritten note of

Mr Champion which has been set out, it is helpful to make reference to Mr

Macmillan’s oral evidence in this respect:514

Yes, the reference to the grounds, the use of those two words “the grounds”, is a reference to the grounds for the Agreement for Lease referred to in the previous sentence falling over, nothing to do with the offer made by Mr Blake which was rejected on 23 April? --- Yes.

Turning to the reality, I suggest to you the reality again relates to the Agreement for Lease currently approved by the Property Committee, not the offer made by Mr Blake, rejected on 23 April? --- I don’t know.

Later, and slightly more expansively, Mr Champion answered:515

Can I take you to the second sentence you’ve written here, after saying that: “The agreement was expected to fall over”, you say: “The grounds are that the parties have not reached agreement on cost. Reality is that Council would not support the site.” You are informing the committee, I suggest, that the stated grounds are that the parties have not reached agreement on the cost of building but the reality is the site would not go ahead because the Council wouldn’t support it, that’s right, isn’t it? --- I believe that that is a view—yes, the agreement was at an end for one reason. As it happened, it would have been difficult to get through because of the lack of Council support in any case.

The true reason is the one described as the reality, isn’t it?---No, I don’t believe that to be the case.

You chose that word?---I didn’t say, “The real reason”, though, for example.

What difference do you see between words “the grounds” on the one hand and “reality” on the other hand?---The grounds are the legitimate reason in which the parties ceased the agreement, the reality is the notation that in any case, the Council was not supportive.

I suggest to you, sir, that is not a believable explanation of your choice of language?---My view, Mr Bick, is that’s what I intended.

172 Mr Champion’s later oral evidence—as set out in the second quoted passage in the

preceding paragraph—is consistent with Mr Macmillan’s thesis that the Agreement

for Lease was “dead” after the 22 April 2010 meeting and that other options were

514 Transcript 958. 515 Transcript 1206–7.


being considered, namely the purchase of the site by Woolworths.516 At the time the

note was written, however, the Agreement for Lease had not been terminated, but

the wording of the note itself is not consistent with Mr Macmillan’s thesis that the

Agreement was “dead” following the 22 April 2010 meeting. Rather, its wording is

consistent with the position that the Agreement for Lease was indeed still on foot

and that whilst other options, including the purchase of the freehold on the

Strathdale site by Woolworths was a possibility, agreement between the parties as to

Landlord’s Works Costs had not then been put to one side. Moreover, the wording

of the note is not inconsistent with the position put by NES that Woolworths chose to

terminate the Agreement for Lease for reasons other than the grounds upon which it

was terminable according to its terms. Accordingly, I am of the view that Mr

Champion’s oral evidence does not detract from the force of this note and that it

should be understood in the manner for which NES contends.

173 This position is, in my view, reinforced when one has further regard to some aspects

of the detail of the dealings between the parties prior to the 22 April 2010 meeting.

174 It was accepted by Mr Macmillan in cross-examination that the function of the open

book review process was to identify the true difference in cost between a Masters

store which would be built at Strathdale and an equivalent Bunnings store.

Moreover, by the end of the line-by-line part of the open book review process, Rider

Hunt estimated the Landlord’s Works Costs at $3,247,195, as set out in an email

dated 31 March 2010 from Mr McDonald, of Rider Hunt, to Mr Macmillan, copied to

Mr Killesteyn, which, omitting formal parts, is as follows:517

Bob,

We have reviewed the submission from Vaughans detailing the cost difference from the Bunnings store at Coburg and the proposed Project Oxygen store at Bendigo and note the following issues;

The Bendigo store is 10,923m2

The Coburg store upon which the comparison is made was built to a 2002 brief. We have not sighted this brief.

516 See above [160] (quoted para (x)). 517 Court Book 3297.


The Project O amenities, administration, mezzanine is 828 m2 compared with the Coburg store at 354 m2. The majority of the mezzanine cost difference (item 54) in the attached comparison exists because of the extra area. We question whether this is correct methodology as the rent may be struck on the area of the store which would then include for this extra cost.

The cost difference includes $200k for light fittings. We understand that this item will now be supplied by Oxygen.

Item 59 is the provisional sum for the floor finish at $30/m2. This does not reflect our understanding of the cost of the current floor specification but is in accordance with the information used by Vaughan.

A cost has been included for plant platform screens, these may not be required. We don’t have them on Braybrook & Coolaroo but may be a planning issue for this site.

The section highlighted in yellow on the attached spreadsheet is our view of the split of the extra cost between base build, site related costs, fitout and authorities fees.

The total difference is $3,247,195 inclusive of additional Preliminaries & Supervision, design fees (2.5%) and builders margin (5%). This has not been finally agreed with Vaughan yet.

This figure was, as NES submits, far greater than the amount which NES had sought

by way of Landlord’s Works Costs.518 By the end of Rider Hunt’s later review of the

Vaughan Constructions estimate—by 15 April 2010—all differences that had been

identified by Rider Hunt,519 such as an adjustment for a benched and levelled site,

had been incorporated by Vaughan Constructions into its revised quotation which,

in substance, is in the following terms:520

Ewen,

As requested below is a consolidation of the original Vaughan Estimate then deducting the “site specific” items requested by the developer:

Vaughan Original Estimate = $12,348,061(+gst)

- Deletions requested by Developer - Power authority & other authority head works contributions - Site levelling with a fall greater than 300mm across the site &

excluding demolition

518 Court Book 3295, 3393. 519 Outline of Evidence of Ewen Kenneth McDonald (27 February 2015) [13]. 520 Court Book 3367 (emphasis in original). See also Court Book 3393.


- Town Planning (DA) Costs

Vaughan Adjusted Estimate = $11,516,809(+gst) or $1,051,36/sqm

Therefore, deduction from total cost for specific site related costs is $831,252(+gst)

Hope this helps and confirming David Smith will be available to meet with you at our office at 10am on Monday morning.

Please feel free to call me with any other queries.

This revised quotation had been incorporated by NES into its revised contribution

notice, namely the letter dated 6 April 2010 from Fetter Gdanski, solicitors for NES,

to Allens Arthur Robinson, solicitors for Woolworths. At this point, negotiations

had concluded, though, as has been observed previously, further assessment was

taking place by Rider Hunt and further advice provided by that firm to Woolworths

in the email correspondence with Mr Macmillan prior to the 22 April 2010 meeting,

particularly the detailed comparison of costs as between the parties which Rider

Hunt had prepared, but which Mr Macmillan failed to read prior to the 22 April 2010

meeting. In this respect, NES submits that the Court should find that, had Mr

Macmillan been authorised to accept a tenant’s contribution amount of greater than

$1.7 million—or a Landlord’s Works Costs of $11.5 million—then, acting with the

requisite contractual object in mind, Woolworths would have accepted NES’s

revised estimate of $2,941,149. Moreover, Mr Blake’s evidence is that NES would

have accepted this figure in order to progress the development.521

175 In light of the costs assessments by Rider Hunt and Vaughan Constructions, it does

appear, as submitted by NES, that it is a reasonable inference for the Court to draw

that the revised amount sought by NES was not accepted by Woolworths as Mr

Macmillan had no authority to accept it.

176 There is further controversy between the parties as to the preparation of the further

report by Rider Hunt which was supplied to Mr Macmillan, but not read by him,

prior to the 22 April 2010 meeting. In any event, even if NES is correct in this

respect, it is further submitted that the request by Mr Macmillan resulted in the

521 Outline of Brendan Edward Blake (6 March 2015) [232]. Court Book 322.


22 April 2010 email to Rider Hunt which contained various errors and in no way

reflected the state of discussions between Vaughan Constructions and Rider Hunt as

at that date.522

177 Consequently, I am of the view that the evidence indicates that the open book

process had been completed by 22 April 2010 and, more precisely, I think by 15 April

2010 as the issues identified by Rider Hunt had then been agreed and incorporated

into the revised estimate provided by NES.

178 Thus, in my view, by 15 April 2010, and thus well before the 22 April 2010 meeting,

there was no genuine disagreement between the parties as to the calculation of the

Landlord’s Works Costs. Moreover, Woolworths was not satisfied with the result

because the true contribution amount exceeded its approved but undisclosed budget

and the store cost exceeded its undisclosed “target”,523 but this state of affairs did not

constitute a “difference” as contemplated by the Agreement for Lease.

Woolworths did not act reasonably to identify and resolve any differences

179 NES also invites the Court to find that Woolworths failed to act reasonably to

identify or negotiate the differences in relation to the calculation of the Landlord’s

Works Costs and the contribution to be paid by Masters. For the reasons which

follow, I accept that, at least in general terms, this is the correct view or

characterisation of the conduct of Woolworths. I would, however, take a different

view with respect to some aspects of the conduct of the parties, as indicated in the

reasons which follow.

180 Mr Blake’s evidence was that Woolworths excluded NES from the open book review

process, or at least did not invite NES to participate in it524 and that Woolworths

failed or refused to provide NES with the reports and documents produced by Rider

Hunt during the open book review, including the Vaughan Constructions

522 See Court Book 4745. 523 As a cost per square metre. The target was $12 million for a 13,500 square metre store. The

Landlord’s Works Costs was $11,516,809 (Court Book 3393) for a 10,923 square metre store. 524 Outline of Brendan Edward Blake (6 March 2015) [199].


comparison on 15 March 2010,525 the Rider Hunt estimate of 29 March 2010,526 or 22

April 2010.527 It is also said that Woolworths also failed to communicate in any

meaningful way what, if any, differences it had identified or why it considered the

NES estimate to be “too high” or “unacceptable”. It is to each of these claimed

deficiencies to which I now turn in some detail.

181 Mr Macmillan admitted in cross examination that it would have been a reasonable

course of action to invite NES to attend and participate in the open book meetings.528

Consistently with this position, Mr McDonald’s evidence was that he expected that

any negotiations to take place between Woolworths and NES were to take place

directly.529 Indeed, Mr Macmillan’s position in this respect is emphasised in its

context of a range of admissions by Mr Macmillan with respect to the approach of

Woolworths to the process of establishing the Landlord’s Works Costs. In this

respect, the critical parts of Mr Macmillan’s oral evidence are as follows:530

I’ve already taken you twice to three emails and once to three conversations in which [Mr Blake] asked for feedback from those meetings, I put it to you again you never asked him to attend?---No.

It would have been reasonable to ask him to attend, do you agree?---He was also aware when those meetings were and could have attended as well.

That’s not the question. It would have been reasonable for you to invite him to attend, do you agree?---A lot of the meetings I didn’t attend either.

HIS HONOUR: Please answer the question?---Sure.

MR BICK: Do you agree it would have been reasonable to invite Mr Blake to attend those meetings?---Yes.

Do you agree that it would have been reasonable to identify the differences as to Landlord’s Works Costs and Woolworths’ contribution to Mr Blake?---Yes.

Do you agree that it would have been reasonable to explain to Mr Blake why you considered or Woolworths considered the Landlord’s Works Costs estimate to be too high or unacceptable?---We were still going through that process but yes.

525 Court Book 3114. 526 Court Book 3293. 527 Court Book 4745. 528 Transcript 959. 529 Transcript 1342. 530 Transcript 959–61.


The answer is yes, is that right?---Yes.

Would it have been reasonable to tell Mr Blake what your expectations were? ---Yes.

Would it have perhaps resulted in Mr Blake having a better understanding of your position?---As I’ve said, he used Vaughans to get a basis of where things - - -

I’m not asking you about his relationship with Vaughans. Would it have been reasonable for Mr Blake to understand your expectations and what they were based on?---Yes.

Would it have been reasonable for you to discuss your expectations and what they were based on with him?---And we were still going through that process, yes.

He wasn’t involved in that process, was he?---No.

Would it have been reasonable for you to discuss any differences you or Riders may have had with Mr Blake?---Once I had a good understanding of those, yes.

Sorry, once?---I had a good understanding of what they were, yes.

Would it have been reasonable for you to get a good understanding of those differences?---At a particular time in the process, yes.

Without understanding those differences, you couldn’t have a meaningful discussion with Mr Blake about them, could you?---Not in detail, no.

Not at all, I suggest?---There was a number of things we had to talk about.

Those discussions didn’t occur?---In the meeting of 22 April we spoke about his expectation of the 2.94, that’s the amount and we also spoke about how that contribution was going to be paid.

If you in fact had a view that $1.176 million was a reasonable expectation, it would also have been reasonable to provide that estimate to Mr Blake so that he could understand where you were coming from, do you agree?---Yes.

Do you agree it would have been reasonable for you to give Mr Blake the Riders reports of 29 March and 22 April?---Well, I assume the 29 March one he may have already received through Vaughans but the 22 April one, I wanted to have a review of that first.

There’s no evidence that the 29 March report from Riders was ever communicated to Vaughans or Mr Blake, Mr Macmillan?---I’m aware of that now.

Do you accept it would have been reasonable for those two reports to be provided to Mr Blake?---Over that period of time, yes.

Do you accept it would have been reasonable for you to discuss those reports with Mr Blake?---The only difficulty with that is the process was still going and there were still further discussions in that regard.


Do you accept it would be reasonable once the further discussions had reached whatever outcome they reached, for you to have those discussions with Mr Blake then about the two Riders reports?---Yes.

Do you agree it would have been reasonable to extend the time for having discussions with Mr Blake until what was occurring or what was to occur after the 15 April meeting had been completed?---Which is the 22 April when we met.

Sorry?---Yes, is your answer.

182 When it was put to Mr Blake in cross examination “You were able to go along to any

of these meetings, if you wanted to, weren’t you?”, Mr Blake said “I was specifically

prohibited from attending these meetings.”531 As indicated in the passage from the

transcript just quoted, Mr Macmillan’s evidence was that he did not invite Mr Blake

to attend the meetings, which he admitted would have been the reasonable thing to

do.532 He did, however, believe Mr Blake knew where the meetings were and could

have attended.533 It goes without saying, however, that a response of this nature is

not indicative of open and willing engagement in a process requiring ongoing

discussions and communication addressing significant detail for the purpose of

determining the Landlord’s Works Costs. Moreover, it appears to be at odds with

the initial “enthusiasm” and apparent pressing urgency on the part of Woolworths

to roll out the Masters stores as soon as possible, as is evidenced by the approach of

proceeding to arrangements with the likes of NES to negotiate construction of a

Masters store at the Strathdale site without the detailed design brief and costings

that might ordinarily be anticipated. In these circumstances, it might be thought that

Woolworths would be insisting on Mr Blake’s close involvement for the purpose of

resolving matters as quickly as possible. The fact that this was apparently not the

case is really almost as surprising as the proposition that a sophisticated and forceful

businessman like Mr Blake could be excluded from this process if he wished to

attend these meetings. In any event, as indicated previously, whether or not

Mr Blake was excluded is not decisive in the present circumstances.534 Rather, the

critical circumstance is the extent to which information was disclosed by

531 Transcript 249. See also Transcript 250–2. 532 Transcript 959. 533 Transcript 958–9. 534 See above [128].


Woolworths, particularly its queries and any concerns as to the cost differences

between the expert estimates and any overriding cost budget which Woolworths

had imposed on the proposed development.

183 In the latter respect, NES submits that while Mr Blake was not able to explain why

Woolworths did not want him present at the open book meetings,535 it is open on the

evidence for the Court to find that NES was not invited to participate in the “open

book” process because, had NES been involved, it may have sought Woolworths’

agreement to a contribution amount that had been verified by Rider Hunt, but which

Mr Macmillan was not authorised to agree to because it exceeded Woolworths’

undisclosed budget. Moreover, it is said that this is likely having regard to the

estimate reached by Rider Hunt on 29 March 2010; namely that the total difference

was then estimated at $3,247,195 inclusive of additional Preliminaries & Supervision,

design fees (2.5 per cent) and builder’s margin (5 per cent).536 In the circumstances, it

is contended that it may be inferred that Mr Macmillan sought to exclude NES from

the process until such time as the construction costs could be reduced to a level that

was within Woolworths’ approved but undisclosed budget. In all the circumstances,

and, particularly, having regard to Mr Macmillan’s apparent lack of interest in

ensuring that he had read and considered the Rider Hunt report of 22 April 2010 at

or prior to the 22 April 2010 meeting—or, if necessary, sought to adjourn that

meeting to allow him to read and consider this further report—I am of the view that

this is, indeed, a fair inference and is more likely than not the position.

184 In any event, NES was not invited to participate in the process, did not participate in

it537 and was, if not excluded or not invited to attend the “open book” process, they

were not provided with information about the progress of the review and the

differences to be resolved, in spite of repeated requests for information in this

respect by Mr Blake.538 No informative response was provided to these requests.

535 Transcript 251. 536 Email dated 29 March 2010 from Mr McDonald of Rider Hunt to Mr Killesteyn of Woolworths and

copied to Mr Macmillan also of Woolworths: Court Book 3293. 537 See Transcript 1274, 1276, 1314. 538 Court Book 3094, 3137, 3164, 3170, 3176, 3288, 3370. See also Transcript 289, 306, 316.


More particularly, in spite of these requests for information arising from the open

book process and despite Woolworths having been provided with detailed

information from Rider Hunt on 29 March 2010 and again on 22 April 2010, these

reports from Rider Hunt were never provided to NES.539 Nor did Mr Macmillan

provide Mr Blake with an update as to the progress of the open book process at the

meeting of 22 April 2010, as he said they simply “didn’t get to that”.540 It is hardly

surprising that the repeated failure by Woolworths to provide NES with details of

any difference in the Landlord’s Works Costs calculation that may have been

identified in the open book process made it impossible for any negotiation to take

place in accordance with cl 2.2(b) of the Agreement for Lease.

185 Rather, throughout March 2010, Mr Blake attempted to discuss the estimate of

Landlord’s Works Costs provided by Vaughan Constructions with Woolworths,

only to be told repeatedly by Mr Macmillan that the estimate was “too high”.541 No

further explanation was provided to NES by Woolworths, no alternative figures

were suggested by Mr Macmillan and no negotiations were entered into by the

parties.542

186 Thus, on 31 March 2010, Woolworths maintained its position that the Vaughan

Constructions estimate was “too high”543 and did not provide NES with the estimate

Rider Hunt had provided to Woolworths and nor did Woolworths articulate any

differences Rider Hunt may have identified in relation to the Vaughan Constructions

estimate.544

187 Having regard to the matters to which reference has been made, it is clear that

Mr Macmillan failed to enter into discussions or to pursue discussions with NES,

particularly with Mr Blake, in relation to the Landlord’s Works Costs, despite being

539 Court Book 3293, 4745. 540 Transcript 845–6. 541 Outline of Brendan Edward Blake (6 March 2015) [207]; Outline of Evidence of Timothy Stuart Macmillan

(27 February 2015) [79]. See also Transcript 581; Court Book 3090, 3074. 542 Outline of Brendan Edward Blake (6 March 2015) [193]; Court Book 1160. See also Transcript 1044–5. 543 Outline of Brendan Edward Blake (6 March 2015) [220]. 544 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [91]; Outline of Brendan Edward Blake

(6 March 2015) [219]. See also Transcript 714.


the person charged by Woolworths with negotiating site deals, including details as

to costs and tenants’ contributions.545 Thus, I accept that it is a reasonable inference,

having regard to these matters, that Mr Macmillan was not prepared to negotiate

any differences in relation to the Landlord’s Works Costs at this stage because the

Masters contribution which had been identified by Rider Hunt still far exceeded his

authorised but undisclosed budget. In my view, this inference is reinforced further

when attention is turned to the meeting of 22 April 2010. It is to this that I now turn

in this context.

188 At the meeting of 22 April 2010, Mr Blake restated the position of NES that

$2.94 million was required by the landlord to progress the project. Again, Mr

Macmillan dismissed this figure as “too high” and the conversation progressed to

how the contribution was to be made.546 No attempt was made, however, to explain

to Mr Blake why the figure was “too high”,547 or which aspects underlying that

estimate were considered to be inaccurate.548 Several individuals attending the

meeting gave evidence that there was no discussion about whether the $2.94 million

figure could be negotiated,549 including the evidence of Mr Macmillan.550 At this

point, excluding variations and adjustments, the Rider Hunt estimate of the

Landlord’s Works Costs, the Masters contribution, still exceeded the approved but

undisclosed budget of Woolworths.551

189 NES submits that insofar as Woolworths had consistently refused to identify any

differences it may have had in relation to the Landlord’s Work Costs, it cannot be

said to have made any genuine attempt to resolve those differences as required by

cl 2.2 of the Agreement for Lease. Despite admitting that it was necessary to identify

any differences that might exist in relation to the Landlord’s Works Costs as part of

545 Transcript 699–700. 546 Transcript 846–7. 547 Transcript 848. 548 Outline of Evidence of Michael David Fetter (6 March 2015) [64]–[65]. 549 Outline of Evidence of Michael David Fetter (6 March 2015) [56], [64]–[65]; Outline of Evidence of Gerald

Peter Davis (6 March 2015) [86]; Outline of Brendan Edward Blake (6 March 2015) [228]. See also Transcript 155, 326, 483, 848–9, 853, 1070.

550 Transcript 703. 551 Court Book 4745.


the obligation under cl 2.2,552 Woolworths did not identify any specific differences

between the Vaughan Constructions and Rider Hunt estimates that were the basis of

the view Mr Macmillan expressed on behalf of Woolworths that the Vaughan

Constructions estimate was “too high”. Moreover, Mr Macmillan admitted that he

failed, at the 22 April 2010 meeting, to disclose to NES what the differences were or

what Woolworths’ position was as “the deal had changed” to looking at the

purchase of land itself.553 The evidence to the effect that the Agreement for Lease

had been discharged or varied at the 22 April 2010 meeting is, I accept, inconsistent

with Woolworths’ pleaded case and the evidence of other persons who attended the

meeting.554 The evidence of Mr Graves to the effect that Mr Macmillan pointed to

examples where he thought the Vaughan Constructions’ costings were incorrect555 is

contradicted by evidence from all other attendees at the meeting,556 including

Mr Macmillan, who admits that they did not go into detail of any of the differences

at that meeting.557 Moreover, the matters that Mr Graves said were identified as

issues with the Vaughan Constructions’ costings were all issues that had been

identified, resolved and incorporated into the revised NES estimate prior to the

22 April 2010 meeting. At best, as contended by NES, these issues may have been

raised as examples of why the Vaughan Constructions costings could not be relied

upon until further work had been completed. I do, however, for the preceding

reasons, reject any suggestion that any extant differences between the parties were

identified or negotiated at the 22 April 2010 meeting.

190 It is in this context that the submissions by Woolworths as to the breaches alleged by

NES with respect to the Landlord’s Works Costs and contribution must be viewed.558

These submissions are, in my view, nothing more than an attempt to justify the

Woolworths position by, in effect, rehearsing arguments and contentions with

respect to the cost of developing the Strathdale site—hence providing a basis for

552 Transcript 907. 553 Transcript 963–4. 554 See above [160]–[165] as to the evidence of discussions at the 22 April 2010 meeting. 555 Transcript 1033–4, 1054–5. 556 Outline of Evidence of Michael David Fetter (6 March 2015) [61]. See also Transcript 493. 557 Transcript 700–1, 846. See also Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [107]. 558 Defendants’ Closing Submissions (3 September 2015) [223]–[239].


Landlord’s Works Costs and contribution—arguments and contentions which

should have been disclosed to and discussed with NES at the relevant time.

191 Mr Macmillan gave evidence that, in his view, any differences Woolworths had

identified with respect to costings did not have to be communicated to NES until the

open book process had been completed.559 However, despite being aware that, at

the time of the 22 April 2010 meeting, Mr Blake regarded the open book process as

completed,560 Mr Macmillan did not advise NES that the process was continuing, nor

did he provide NES with information about the progress made or the differences

identified. As any differences that Woolworths may have had were never properly

identified by it or articulated to NES, the parties did not, and could not, have

negotiated to resolve any such differences. It is, of course, so obviously the position

that if parties do not identify differences between them, the prospect of negotiating

those differences to agreement is likely to be dramatically reduced, almost to the

point of impossibility, depending on the particular circumstances. In the present

circumstances, anyone involved in this process would have, from their expertise and

experience, appreciated that impossibility was the likely outcome.

192 Going back to the 22 April 2010 meeting, when Mr Blake suggested that the

Landlord’s Work Costs and Masters’ contribution could be reduced if the

Woolworths specifications were varied, the evidence is that this line of discussion

was not pursued.561 Rather, the conversation moved to the form of the contribution

that was to be made by Woolworths.562

193 Also, going back to the 22 April 2010 Rider Hunt report, to the extent that this report

may have identified differences in relation to the calculation of the Landlord’s Works

Costs or Masters’ contribution, the evidence is as has already been observed, that

Mr Macmillan did not read the report and that Woolworths had not yet confirmed or

559 Transcript 908. 560 Transcript 718. 561 Outline of Brendan Edward Blake (6 March 2015) [232]. See also Transcript 888; Outline of Evidence of

Gerald Peter Davis (6 March 2015) [88]. 562 Outline of Brendan Edward Blake (6 March 2015) [233].


accepted any of the differences identified by Rider Hunt.563 Despite having

discussed the report briefly with Mr McDonald that morning, Mr Macmillan

conceded that he did not have a proper understanding of the estimates and

differences,564 which prevented there from being any meaningful or detailed

discussion with NES regarding those differences.565 Moreover, Mr Macmillan

admits that he made no attempt to negotiate the Landlord’s Works Costs

contribution,566 or to offer a figure that was acceptable or would have been

acceptable to Woolworths567 and that no negotiations were entered into at the

meeting because he regarded the open book process as ongoing.568 I accept that even

if this was the case and that the open book process was ongoing, this would not have

precluded Woolworths from providing NES with the information it had requested.

Indeed, if this was the position held by Woolworths, then it would have been

expected that the differences identified in the 22 April 2010 Rider Hunt report would

have been communicated to NES and attempts made by Woolworths to negotiate

any differences in relation to the Landlord’s Works Costs estimate subsequent to the

22 April 2010 meeting or at any time prior to termination.569

194 For the preceding reasons, I am of the opinion that Woolworths did not act

reasonably to identify and resolve any differences it may have had with the NES

estimate of the Landlord’s Works Costs or the Masters contribution.

Role of Vaughan Constructions

195 Woolworths, in its Defence, denies that it failed to act reasonably and in good faith

in an attempt to resolve differences it had with NES in connection with the

determination by NES of the Landlord’s Works Costs. The particulars provided to

that Defence state that Woolworths acted reasonably and in good faith to resolve the

differences between Masters and NES because “Masters and Riders” communicated

563 Transcript 907–8. 564 Transcript 907–8. 565 Transcript 960. 566 Transcript 853. 567 Transcript 854. 568 Transcript 699–700, 907–8, 960–2. 569 Transcript 155, 462.


with “representatives from NES and Vaughan Constructions” to communicate,

consider and attempt to resolve these differences.570 The communications in

question were communications between Woolworths, Rider Hunt and Vaughan

Constructions during the “open book” review process.

196 As NES observes in its submissions, there are some obvious difficulties with this

defence. First, Woolworths does not contend that it discharged its obligation to act

reasonably and in good faith by identifying differences in relation to the estimate by

NES of the Landlord’s Works Costs and communicating and attempting to resolve

those differences with NES directly, as the Agreement for Lease contemplates.

Instead, Woolworths contends that the communications and negotiations took place

between “Masters and Riders” on the one hand and “NES and Vaughan

Constructions” on the other hand during the “open book” review process. As has

been indicated in the preceding reasons, the evidence is, however, to the contrary.

197 The evidence is that NES was not invited to, and did not, participate in the “open

book” review process and that there were no material communications between

Woolworths and NES in which Woolworths identified differences in relation to the

NES estimate of the Landlord’s Works Costs or the Masters contribution or sought to

negotiate to resolve any differences between the parties. The only communications

with NES, save at the 22 April 2010 meeting, were to the effect that the estimate was

“too high” and that the open book process was continuing. Moreover, as has been

indicated previously, even the discussions at the 22 April 2010 meeting took matters

little further than the repetition of the Woolworths position that the estimate was

“too high” and in circumstances where the reason for this position continued to

remain opaque. Consequently, as NES did not participate in the “open book”

process and had no material discussions with Woolworths regarding issues with the

Landlord’s Works Costs estimate, Woolworths’ defence must rest on the contention

that Vaughan Constructions participated in the “open book” process as an agent for

NES. NES, in its submissions, says that this contention is unpleaded. Nevertheless,

570 See Amended Defence (28 November 2013) [15].


the issue was addressed at trial in circumstances where it now does need to be

addressed. It should also be observed that the contention that Vaughan

Constructions had the authority, as agent, to communicate, consider or conduct

negotiations on behalf of NES was not put directly to Mr Blake in cross-examination.

In any event, I accept for the reasons which follow that the evidence does not

support such a finding.

198 It is well settled that it is not sufficient to establish an agency relationship that one

person did work at the request of another person for that person’s benefit.571 On the

contrary, it is necessary to look to the substance of the relationship, including the

agreement and precise circumstances of the relationship between the parties, to

determine whether or not an agency relationship exists.572 It is central to the notion

of agency that there be the consent of the principal for the agent to act on his or her

or its behalf573 and the conferral of authority by the principal on the agent, including

the principal’s ability to control his or her agent.574 Thus, every agency relationship

necessarily involves the agent having “actual or apparent authority to act, or in fact

acting, as representative of or for or on behalf of another person”.575 Thus, where a

person exercises a right he, she or it already possesses,576 as distinct from a right

conferred by the principal,577 no agency relationship will arise.

199 Turning now to specific matters with respect to Vaughan Constructions, the

evidence establishes, in my view, that, contrary to the contention of Woolworths,

Vaughan Constructions was not engaged by NES as an agent to represent it in the

“open book” review process. Consequently, communications between Woolworths

and Vaughan Constructions would not, in themselves, discharge Woolworths’

obligations to communicate with NES by Rider Hunt communicating with Vaughan

571 Gino Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014) 7–8 [1.5]; Colonial Mutual Life

Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41 at 48.

572 Gino Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014) 7–8 [1.5]. 573 Gino Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014) 5–6 [1.4], 81–9 [4.1]–[4.13]. 574 Gino Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014) 5–6 [1.4], 87 [4.12]. 575 NMFM Property Pty Ltd v Citibank Ltd (2000) 107 FCR 270 at 387 [522]. 576 789Ten Pty Ltd v Westpac Banking Corporation Ltd (2005) 215 ALR 131 at 147 [62]. 577 Jones v Bouffier (1911) 12 CLR 579 at 611.


Constructions. Rather, the evidence in relation to how Vaughan Constructions

became involved in the open book process is that:

(a) it was Vaughan Constructions that approached Woolworths directly to go

through its estimates with Woolworths and Rider Hunt, rather than at the

direction of NES;578

(b) Woolworths, and not NES, arranged to meet with Vaughan Constructions to

review the Vaughan Constructions estimates;579

(c) NES was not invited to and did not participate in the open book process; and

(d) the only involvement of NES was that it requested Vaughan Constructions to

make its costings and workings available to Woolworths and Rider Hunt if

Vaughan Constructions was comfortable doing so.580

As to the latter, with respect to the only involvement of NES, the evidence is that

Vaughan Constructions was engaged by NES merely to provide a quote to perform

the work and was asked by NES to make their workings available to Rider Hunt.

This is made clear in an email from Mr Blake to Mr Vaughan, copied to Mr Grigg,

both of Vaughan Constructions, dated 9 March 2010 which, omitting formal parts, is

as follows:581

Costs Estimate under the WOW AfL Sec. 2 (a)(ii)

Last week I provided Woolworths a copy of your WOW Home Improvement Centre estimate in accordance with our AfL provision Sec. 2.2 (confidential extract attached).

I was today advised by my lawyers that my letter to WOW lacked the necessary detail to properly comply with the requirement of Sec. 2.2.

Item 2.2(a)(ii) required the Landlord to provide its costing on an “open book” basis. The estimate I provided WOW is not considered to be “open book”. I am advised that in order to properly fulfil the requirements I am required to

578 Court Book 3074. 579 Court Book 3090. 580 Court Book 3083. 581 Court Book 3083 (emphasis in original).


provide all the costings to WOW, not just the final figures, or alternately, access to the workings by WOW in the likely event they will ask their assessors/QS’ to view the file.

Letter of Offer

Our Letter of Offer from WOW for this site requires us to ascertain the construction price of a comparable dimensioned “warehouse style hardware store, (full height pre-cast)” e.g. Bunnings and use that base cost to establish any amount the Tenant is required to contribute to the construction under Sec 2.2(a)(iii) as the difference between the “Bunnings style” base cost and the WOW cost.

The current estimate provided by Vaughan allows a range of options not currently provided under our current comparable hardware store estimate. Could you please therefore remove the following items from your estimate and provide a fresh estimate with these items separately itemised:

- Power authority head works; and - Site levelling with a fall greater than 300mm across the site.

This will assist us in providing comparable estimates.

Comparable Estimate

If you are able would you please assist us by providing a comparable D & C estimate for an “alternative hardware warehouse” e.g. Bunnings using the WOW site plan and external dimensions on the following basis:

- Warehouse of total dimensions 10,738m2 on a 24,700m2 site; - full height pre cast panels; - full architectural documentation; - DA application costs excluded; - power authority head works excluded; - fall no greater than 300mm across the site.

Could you also advise if you are comfortable providing the “open book” costings for WOW’s inspection.

Please contact me if you have any questions.

200 What was put to Mr Blake with respect to the relationship between NES and

Vaughan Constructions was that the latter had “assisted” NES with its negotiations

with Woolworths in relation to the determination of Landlord’s Works Costs. This

was repeatedly denied by Mr Blake,582 who also denied that Vaughan Constructions

was reporting to NES or keeping it informed.583 Consistently with the position that

NES was not receiving any information from Vaughan Constructions about the

582 Transcript 238, 242–3. 583 Transcript 237, 248–9.


progress of the discussions is Mr Blake’s repeated requests for feedback on the open

book process, both orally and in writing,584 a position which Mr Macmillan appears

to have accepted in that he admitted that he intended to provide Mr Blake with an

update on the open book process at or prior to the 22 April 2010 meeting.585

201 Mr Blake’s evidence was that the role of Vaughan Constructions was to provide NES

with the quote to construct the Masters store,586 which quote was to be given to

Woolworths to enable Rider Hunt to perform a “cost comparison”,587 and to assist

Woolworths and Rider Hunt in performing that cost comparison;588 thus Mr Blake

said:589

[Vaughan Constructions] were requested to open up their books to Riders so there could be an open book process, they could look at all the particular items and determine the differences in costs between a Bunnings and a Masters store.

This evidence is also, in my view, consistent with Mr Blake’s email of 9 March 2010

to Vaughan Constructions, which is set out above.590 It was also put to Mr Blake that

Vaughan Constructions had updated NES on the open book process. In response,

Mr Blake said:591

No … There was no update provided to me ever by any party whether it be Woolworths, Riders or Vaughans.

202 Mr Blake also denied that Rider Hunt had updated NES on the process.592

Moreover, Mr Blake said that it was his understanding of the “open book” process

that Woolworths would provide a report that verified the Landlord’s Works Costs

calculations at the end of the open book process.593 When asked by the Court

“[W]ho would present you with the differences in that process?”, Mr Blake

responded “I expected Woolworths to. I had no direct communication with Riders, I

584 Transcript 697. 585 Transcript 845. 586 Transcript 243. 587 Transcript 238. 588 Transcript 242. 589 Transcript 243. 590 Court Book 3083. 591 Transcript 245. See also Transcript 239, 246. 592 Transcript 246. 593 Transcript 246.


had no contact with Riders, only with Woolworths.”594 Finally, I accept that this

evidence is consistent with the contemporaneous documents which show that NES

repeatedly requested information from Woolworths regarding the outcome of the

open book process; requests which went unanswered.595

203 In cross-examination, Mr Blake was asked how NES was fulfilling its obligation to

negotiate the Landlord’s Works Costs:596

Do you agree that your state of mind at this time was that you, as well as Woolworths, had an obligation to negotiate the Landlord’s Works Costs figure, that is the total figure, do you agree with that?---I’m not sure if it was the total figure or it was the individual items that required negotiation.

But you understood that you had an obligation to negotiate whatever it was? ---Yes.

Tell his Honour how you were fulfilling your obligation to negotiate in that regard?---Once my final figure had been presented, which was the $12.3-odd million less the $831,000, which was our final construction figure, we presented that to Woolworths. We waited and we expected to get a Rider report, which we never saw. The April 22 meeting where we met with Michael Graves to talk about those issues, but we waited and we expected and we looked for figures and we looked for something to talk about but there was no offer of any report, any result, any substance, nothing. So we were never able to open negotiations because Woolworths would not contribute to our discussion.

Clearly, these questions were directed to the attempts that NES had made to resolve

any differences that may have been identified in relation to the Landlord’s Works

Costs.

204 I accept that, as submitted by NES, this evidence was consistent with the evidence of

Mr Macmillan of Woolworths, who admitted that Woolworths had not disclosed its

expectations or any differences it may have had with the NES calculations to NES

and admitted that negotiations to resolve those differences had not taken place.

More specifically:

(a) When it was put to Mr Macmillan that it was deceptive for Woolworths not to

disclose to NES the Rider reports, Woolworths’ expectations and any issues

594 Transcript 253. 595 See Court Book 3094, 3137, 3164, 3170. See also Transcript 289, 306. 596 Transcript 247.


Woolworths may have had in relation to the Landlord’s Works Costs, Mr

Macmillan said “No … Because at that stage Brendan Blake had Vaughans,

we were using Riders and they were still going through a process of coming

up to where our view of where the Landlord’s Works Costs was going to

be.”597

(b) When it was put to Mr Macmillan that Woolworths had not communicated to

NES the Rider Hunt report, Woolworths’ expectations or any differences

Woolworths may have had in relation to the Landlord’s Works Costs

estimate, Mr Macmillan said “No, because we were still going through the

process.”598

(c) When it was put to Mr Macmillan that (as a result) NES was not aware of the

existence of Woolworths’ expectations or any issues Woolworths may have

had in relation to the Landlord’s Works Costs estimate Mr Macmillan said

“[Mr Blake] knew that [Woolworths] were still having ongoing discussions

with Riders and our consultants.”599

(d) When Mr Macmillan was asked when Woolworths intended to discuss with

NES its expectations and any differences it may have had in relation to the

Landlord’s Works Costs, Mr Macmillan responded “We had the meeting on

… [22 April 2010]. At that time we were going to go through some of the

other matters. I still had to review the Riders report but at that particular

time, that point in time, it then moved very quickly on to, let’s have a look at

now purchasing the site.”600

(e) When it was put to Mr Macmillan that Woolworths had not discharged its

obligation under the Agreement for Lease to disclose and attempt to resolve

any differences Woolworths may have had in relation to the Landlord’s

Works Costs with NES, Mr Macmillan responded “Well, we hadn’t got to that

597 Transcript 961–2. 598 Transcript 962. 599 Transcript 963. 600 Transcript 963.


timeframe yet because the deal had changed.”601

In my view, it is clear on the basis of these responses and other evidence to which

reference has been made that it may be inferred that the non-disclosure of

Woolworths’ expectations in relation to costing also included non-disclosure as to its

budget with respect to Landlord’s Works Costs.

205 Returning more specifically to the “relationship” between NES and Vaughan

Constructions, it is to be observed that there was no evidence in the proceeding of

any express or implied agreement or consent on the part of NES to confer on

Vaughan Constructions the authority to negotiate with Woolworths to resolve any

differences Woolworths may have had in relation to the Landlord’s Works Costs;

and the mere fact that Vaughan Constructions was NES’s builder takes matters no

further in all the circumstances.602 On the contrary, as indicated in the preceding

discussion, the only request made by NES was that Vaughan Constructions make its

workings available to Woolworths.603 NES did not request that Vaughan

Constructions act on its behalf in negotiating with Woolworths, nor did Vaughan

Constructions undertake to perform any such duty on behalf of NES.604 Neither was

there any evidence in the proceeding that Vaughan Constructions had in fact

negotiated or purported to negotiate on behalf of NES, with or without the

knowledge or assent of NES,605 or that NES had ratified any such conduct. There

was no evidence that NES conferred any actual authority on Vaughan

Constructions,606 nor any circumstances in the case that would warrant the

implication of an agency relationship. Also, there was no evidence that NES had any

control over Vaughan Constructions during the open book process; in fact, the

evidence is to the contrary.607 Moreover, the email of Mr Grigg of Vaughan

Constructions to Mr Blake dated 16 March 2010 opens with the words, “As per my

601 Transcript 964. 602 See Defendants’ Closing Submissions (3 September 2015) [214]. 603 See Court Book 3083. 604 Cf Morgans v Launchbury [1973] AC 127 at 140–1. 605 Bonette v Woolworths Ltd (1937) 37 SR (NSW) 142 at 150. 606 NMFM Property Pty Ltd v Citibank Ltd (2000) 107 FCR 270 at 387 [522]. 607 ACN 007 528 207 Pty Ltd v Bird Cameron (2005) 91 SASR 570 at 595 [110].


email below and your previous request, we confirm the following items for your

negotiations with Woolworths/Bunnings”.608 The reference to “the email below” is

a reference to an email dated 11 March 2010 from Mr Grigg to Mr Blake (copy to Mr

Vaughan) which, omitting formal parts, is as follows:609

Further to your email request below and our discussions, I confirm we are currently undertaking the 3 items you have requested as per below:

1. Cost Estimate under WOW AFL – We confirm that a meeting with WOW & Rider Hunt has been scheduled for this Friday at our office to undertake an initial discussion on the difference between Warehouse Style Hardware Store Specification and WOW Project Oxygen Specification. At this meeting we will make available to WOW our Bill of Quantities for inspection and assessment at our office in an “open book” forum and discuss any queries. I will contact you following this meeting to discuss progress and the proposed mechanism for further investigation on identified differences.

2. Letter of Offer (Comparable Construction Price) – We are currently making adjustments to our original cost estimate for the two deductions you mention below along with deletion of DA costs and will provide Revised Figure ASAP.

3. Comparable Estimate for Alternative Hardware Warehouse (Full height precast on 10,738m2 Bldg area) – We are currently preparing an Estimate for this option and will confirm our cost ASAP for your comparable D&C purposes.

Please contact me should you require any further information.

In my view, these emails do, as submitted by NES, confirm that the open book

process did not, of itself, constitute the negotiations between the parties.610

206 Moreover, Mr Macmillan also admitted that the decision maker for NES was

Mr Blake,611 and not Vaughan Constructions and that, ultimately, it was Woolworths

and Mr Blake who had to attempt to resolve the differences and reach agreement.612

Thus, for this and the preceding reasons, there is no basis for the view that it was

reasonable for Woolworths to believe that Vaughan Constructions was acting as the

608 Court Book 3133. 609 Court Book 3134–5 (emphasis in original). 610 See Outline of Brendan Edward Blake (6 March 2015) [207]. 611 Transcript 909. 612 Transcript 962.


agent of NES.613 Neither does a general statement by Mr Blake in cross-examination

that certain actions on the part of Vaughan Constructions were “done on my

behalf”.614 This recognition is further confirmation that Vaughan Constructions was

not acting as the agent of NES and that the open book discussions did not constitute

negotiations with NES for the purposes of cl 2.2 of the Agreement for Lease.

207 For the preceding reasons, I am of the opinion that Vaughan Constructions was not

an agent of NES and that communications between Woolworths, Rider Hunt and

Vaughan Constructions, to which NES was not a party, cannot assist Woolworths in

these proceedings. The participation of Vaughan Constructions in the “open book”

review process did not absolve Woolworths of their obligation to identify and

resolve any differences they may have had with the NES estimate of the Landlord’s

Works Costs with NES which Woolworths failed to do.

Woolworths did not act in good faith to identify and resolve any differences

Woolworths’ unwillingness to engage with NES

208 The evidence to which reference has been made, particularly the documentary

evidence referred to in the immediately preceding discussion, discloses, in my view,

a continued unwillingness on the part of Woolworths to communicate to NES any

differences that it may have had in relation to the estimate by NES of the Landlord’s

Works Costs or of Masters’ contribution to those costs. I am also of the view that the

evidence also reveals a continued unwillingness on the part of Woolworths to

provide NES with any detailed or transparent information in support of its

otherwise bare assertion that the NES estimate was “too high” or “unacceptable”,

that would enable NES to negotiate with Woolworths in any meaningful way to

resolve any differences between them in relation to these calculations.615 This is true

even at the 22 April 2010 meeting, a meeting which was called for the purpose of

attempting to resolve any differences in relation to the Landlord’s Works Costs.616

613 Cf Defendants’ Closing Submissions (3 September 2015) [214]–[221]. 614 See Defendants’ Closing Submissions (3 September 2015) [215]. 615 Transcript 959. 616 Transcript 845–6.


Mr Macmillan admitted that Woolworths said nothing more, in relation to the

Masters’ contribution amount, than that the $2.94 million that had been sought by

NES was “too high”;617 a position that Woolworths had adopted since receiving the

report in early March.618

209 On Mr Macmillan’s own admission, Woolworths did not put a figure to NES at the

22 April 2010 meeting that would have been acceptable to it,619 and nor did

Woolworths attempt to negotiate620 or actually negotiate621 the Masters’ contribution

with NES at that 22 April 2010 meeting. Moreover, to the extent that a figure of

$1 million may have been put forward,622 such figure could not have been a genuine

attempt to resolve differences, as it was less than one third of the Rider Hunt

estimate provided at the end of the open book process623 and 30 per cent less than

the estimate provided by Rider Hunt on the morning of 22 April 2010.624

Mr Macmillan’s explanation for not negotiating with NES to resolve any differences

it may have had at the 22 April 2010 meeting, namely that he was not given the

opportunity, should, in my view, be rejected.625 As observed by NES in its

submissions, even Mr Macmillan admitted that there were no discussions at that

meeting about whether or not NES would be prepared to negotiate its estimate.626 In

my view, there can be no doubt that had Woolworths wanted to disclose its

differences with respect to costings, or to negotiate them, or to adjourn the meeting

until it was in a position to do so having had the chance to read and consider the

Rider Hunt report delivered on the morning of the 22 April 2010 meeting, it could

easily have done so.

210 Moreover, notwithstanding that Mr Macmillan had received an updated report from

Rider Hunt on the morning of 22 April 2010, before the meeting on that day,

617 Transcript 846–53. 618 See above [185]–[189]. 619 Transcript 854. 620 Transcript 853. 621 Transcript 848. 622 Transcript 855. 623 Court Book 3293. 624 Transcript 857. 625 Transcript 854. 626 Transcript 853.


Woolworths took no steps to identify or resolve any differences that it may have had

after the 22 April 2010 meeting. Mr Macmillan admitted that he did not consider the

further Rider Hunt report of 22 April 2010 or meet with Rider Hunt to discuss that

report or to give that report to NES after the 22 April 2010 meeting. Mr Macmillan’s

explanation for not doing so was that there was no reason to “because we were then

considering purchasing the site.”627 This is inconsistent with Woolworths’ pleaded

case that it had in fact discharged its obligations under the Agreement for Lease. As

observed by NES in its submissions, Woolworths does not allege that the Agreement

for Lease was terminated or varied at the 22 April 2010 meeting; and nor could it do

so on the basis of the evidence.628 Furthermore, Mr Macmillan admitted that

Woolworths had not taken numerous steps, including inviting NES to attend and

participate in the open book meetings, disclosing any differences it had identified in

relation to the Landlord’s Works Costs, providing NES with reports and information

it had received from Rider Hunt during the open book process or negotiating any

differences it had identified, each of which Mr Macmillan considered to be

reasonable steps that it might have taken.629 Mr Macmillan said these steps had not

been taken because the process had not reached that stage.630

211 For the preceding reasons, it is clear, in my view, that Woolworths was unwilling to

engage with NES in any meaningful way to discuss and to seek to facilitate the

process of resolving any differences between the parties with respect to the cost

estimates for the Landlord’s Works Costs or Masters’ contribution to those costs.

The effect of Woolworths’ undisclosed budget

212 NES submits that it is open to the Court to find, and the Court should find, that the

reason for Woolworths’ continued unwillingness to engage with NES, from March

2010 until 22 April 2010, was that Mr Macmillan was not free to negotiate a Masters

contribution amount that exceeded Woolworths’ undisclosed budget. Moreover, it

627 Transcript 859–60. 628 Transcript 1056. 629 Transcript 689. 630 Transcript 718.


is submitted that the Court should infer that the only “stage” at which Mr Macmillan

would have engaged with NES in relation to any differences was if Woolworths,

Rider Hunt and Vaughan Constructions had been able to reduce the construction

costs to the point where the Masters’ contribution was less than the $1.7 million

Woolworths budget and where the Landlord’s Works Costs were in line with

Woolworths’ (also undisclosed) construction cost target of $12 million based on a

13,500 square metre store; which Mr McDonald admitted that he and Woolworths

were working towards.631 Moreover, as NES observes, the $12 million generic target

would be less than $10 million on a pro rata basis for the 10,738 square metre Bendigo

store. Further, the Landlord’s Works Costs reached by Rider Hunt and Vaughan

Constructions by 18 April was $11,516,809.632 Thus, where the true cost difference to

construct a store to Masters’ specifications far exceeded the $1.7 million budget,633

Mr Macmillan could never have discharged Woolworths’ obligations under cl 2.2 of

the Agreement for Lease, and certainly not within the six week period contemplated

by cl 2.2(c)(ii) of the Agreement for Lease, and not without successfully putting a

business case to the Woolworths Property Committee for approval of a higher sum,

which he never attempted to do.

213 For the preceding reasons and the reasons advanced by NES and the material relied

upon in relation to the undisclosed budget issue, I do draw the inferences which

NES seeks the Court to draw in this respect. Moreover, having regard to the matters

to which reference has been made, I reject the Woolworths submission that there

remains any issue with respect to puttage to Mr Macmillan.634

214 NES also contends that it is open to the Court to find, and that the Court should find,

that the reason Woolworths did not take reasonable steps to engage with NES to

resolve differences in relation to the Masters’ contribution after the 22 April 2010

meeting, but before termination of the Agreement for Lease, was because

Mr Macmillan mistakenly believed that the effect of Mr Blake having offered to sell

631 Court Book 5698. See also Transcript 1278, 1284, 1288, 1311, 1352. 632 Court Book 3393. 633 See the letter from Fetter Gdanski to Allens Arthur Robinson dated 6 April 2010: Court Book 3345. 634 Cf Transcript 1468.


the land to Woolworths as an alternative relieved Woolworths from its obligations

under the Agreement for Lease. I accept that Mr Macmillan’s evidence would tend

to support this inference, though having regard to the broader evidence and the

matters already considered in these reasons, prior to the 22 April 2010 meeting, the

meeting itself and subsequent matters, I accept that Mr Macmillan may well have

been mistaken in this respect, but this does not, however, detract from the position

that even in light of the further Rider Hunt report received on the morning of

22 April 2010—prior to the meeting held on that day—no further attempt was made

to discuss the position of the parties with respect to cost estimates underlying the

calculation of the Landlord’s Works Costs. In my view, this aspect is emphasised

when it is considered that even when Woolworths decided that the purchase of the

site was not an attractive option, there was, even then, no apparent inclination to

revisit the further Rider Hunt report and to pursue discussions to attempt to resolve

differences with respect to the Landlord’s Works Costs.

215 Consequently, it would appear to be the case that Woolworths had set an internal

budget that limited the amount that Woolworths would contribute to the

construction costs of $1.7 million,635 at a time when the true cost difference between

constructing a store to Masters’ and Bunnings’ specifications was not known, and by

requiring Mr Macmillan to operate within that budget unless there was some

business case that warranted an increase.636 In spite of the fact that the true cost

difference far exceeded that amount,637 Woolworths, through Mr Macmillan, was not

able or willing to engage with NES in the way that the Agreement for Lease, which

did not contemplate any budget, required of Woolworths.

216 For these reasons, the finding of the Court follows that Woolworths failed or refused

to take those steps, such as inviting NES to participate in the “open book” process,

communicating any differences that were identified during that process and actively

seeking to resolve those differences, that a reasonable person, who had the sole

635 Transcript 1124. 636 Transcript 1148. 637 See the email of 29 March 2010 from Mr McDonald of Rider Hunt to Mr Killesteyn, copied to

Mr Macmillan, of Woolworths: Court Book 3293.


object of cl 2.2(b) of the Agreement for Lease in mind—being to identify and resolve

differences in relation to the Landlord’s Works Costs and the Masters contribution—

would have taken in order to identify and resolve differences in relation to the

Masters contribution, because to do so would have been inconsistent with its

approved budget and business case, being some other object not contemplated by

the Agreement for Lease. Thus, the finding also follows that, acting with some other

object in mind, and not being faithful to the contractual obligation in cl 2.2 of the

Agreement for Lease, Woolworths breached its obligation to act reasonably and in

good faith in accordance with cl 2.2(b) of the Agreement for Lease.

Other matters affecting Woolworths’ performance of its obligations

217 NES contends that there were, in addition to the matters already discussed, a

number of other objectives or considerations that it is open for the Court to find, and

that the Court should find, Woolworths took into account when performing its

obligations—or purporting to perform its obligations—under cl 2.2 of the Agreement

for Lease. It is submitted that these matters were certainly operative, as, it may be

inferred, was the inability to bring construction costs within budget, in the decision

by Woolworths to terminate the Agreement for Lease. Further issues are raised with

respect to the decision to terminate, issues which are discussed further in the reasons

which follow.

Pursuit of the Hume & Iser site

218 NES contends that it is open to the Court to find—on the basis of Woolworths’ own

contemporaneous documents to which reference has already been made—and that

the Court should find that, by at least 16 March 2010 and well before the open book

process had been completed or negotiations had taken place with NES, Woolworths

had decided to abandon the Strathdale site in order to pursue another, strategically

important, site in Bendigo.

219 The evidence is that on 9 March 2010, well before the Rider Hunt open book review


had been completed, Mr Danks, together with Mr O’Brien from Woolworths638 and

others met with Mr Iser to discuss the potential purchase of the Hume & Iser site by

Mr Danks. The significance of these discussions in terms of the present proceedings

appears clearly from the email of 24 April 2010 from Mr Danks and to Mr Macmillan

which, omitting formal parts, is as follows:639

Thanks for your note—I have only just logged on at 23:15 Friday evening (ie Sat 08:00 your time) I now understand much better the situation around the McIvor Hwy site

As I told you on the phone this morning, we both need to work with Stephen Iser, as unfortunately he has not [moved] forward very much since our meeting with Grant O’B on Tues 9 March

I understand Stephen has discussed the idea of either

doing a joint venture with an option to purchase the business and site

and/or a straight sale of the business with his independent Chairman but has not shared everything with his whole Board Stephen is very concerned with keeping any discussions very confidential

Tim, your knowledge and relationship with the Bendigo Council I am sure will be a great help in moving this project forward.

I do not know if you have had a full briefing on the Hume & Iser meeting and/or the discussions with GOB, Mark Fleming & David Hunt were also present at the meeting, they maybe of [some] help for back grounding If not, you and I can share notes as we move forward

Stephen has previously held discussions [with] Bunnings, signed a CA, shared all his figures and then nothing happened for months, I think this all took place in second half of 2009 He decided to share this information with Danks in late Feb 2010

After the meeting with GOB, Stephen was wanting to immediately go back & tell Bunnings that he was having discussions with another party—I strongly counselled him NOT to do this, I believe he has not anything further along this line

Can I strongly suggest you have Stephen sign a WOW Confidentiality Agreement, to lock him into exclusive discussions for a period and to reassure him that these discussions are very serious—I am sure Mark F can help with this I would also suggest you mention this prior to meeting with him, so it is not a shock to him

As a reminder, Stephen will be away in the USA from approx 29 April



Stephen has also suggested that he would like to get together with you this coming week if suits you both

I hope these notes are of some help to you and I look forward to hearing how you go with your discussions

220 Following the meeting on 9 March 2010 between Mr O’Brien, Mr Fleming and Mr

Hunt from Woolworths, Mr Danks and Mr Iser (none of whom were called to give

evidence) but before termination of the Agreement for Lease:

(a) Mr Iser discussed the idea of doing either a joint venture with Woolworths

with an option for Woolworths to purchase the business and site or a straight

sale of business to Woolworths with the Independent Chairman of Hume &

Iser but not the whole Board (as is clear from the 24 April 2010 email, set out

above);640

(b) Mr Danks had spoken to Mr Macmillan about Hume & Iser. Following that

discussion Mr Danks had said to Mr Iser that Woolworths was “very keen to

discuss your plans to redevelop the [Hume & Iser] site sometime in the

future”;641

(c) Mr Danks and Mr Macmillan had agreed that Oxygen would walk away from

the Bendigo site in order to progress the Hume & Iser site as an Oxygen site,

as it was thought to be in a better location and would be supported by the

Council;642

(d) Mr Danks had provided Mr Macmillan with Mr Iser’s mobile number and

private email address and requested that Mr Macmillan have Mr Iser sign a

confidentiality agreement to prevent him from reporting back to Bunnings

that he was having discussions with Woolworths;643

(e) Mr Macmillan had sent Mr Iser a confidentiality and exclusive dealing

agreement with an exclusive dealing period of six months and a three month

640 Court Book 3421. 641 Court Book 4685. 642 Court Book 3422. 643 Court Book 3421.


extension;644

(f) Mr Macmillan and Mr Iser had met personally and Mr Iser had agreed to

send Mr Macmillan a design plan for the Hume & Iser store.645 At that

meeting Mr Iser had said to Mr Macmillan that he was “very interested in

progressing negotiations with Oxygen” and that he had executed the

confidentiality and exclusive dealing agreement Mr Macmillan had sent

him;646

(g) Mr Iser sent Mr Macmillan his private email address so that they could

“communicate without the risk of anyone looking”;647

(h) Mr Iser had sent Mr Macmillan draft plans of a potential redevelopment of

the Hume & Iser site which Mr Macmillan was sending to an architect to have

further schemes undertaken;648

(i) Mr Iser and Mr Macmillan had agreed to meet with the CEO and Strategic

Planner of the Council (on Mr Iser’s return from overseas);649 and

(j) Mr Macmillan had held telephone discussions with Council officers who were

very supportive of a potential development of the Hume & Iser site and had

advised that they would assist. Mr Macmillan described the above as a “good

start!”650

221 Following the meeting of 9 March 2010 with Mr Danks but before termination of the

Agreement for Lease:

(a) The Property Committee resolved to pursue that site on 16 March 2010.651

(b) The status of the Bendigo site following the Property Committee meeting that

644 Court Book 3427, 4688. 645 Court Book 4686. 646 Court Book 3427. 647 Court Book 4687. 648 Court Book 3427, 4486. 649 Court Book 3427. 650 Court Book 3427. 651 Court Book 3138, 3141.


day had changed to: “Landlord has funding issues. Alternative site being

pursued. Check the legal position in relation to negotiations on site.”652

(c) The minutes of the Property Committee on 6 April 2010 stated that: “Deal

likely to fall over”.653 The Matters Arising Log stated: “Landlord has funding

issues. Alternative site being pursued. Check legal position in relation to

negotiations on site.”654

(d) By 23 April 2010 Mr Macmillan said to Mr Danks by email that Woolworths

was willing to walk away from the Bendigo site. Mr Macmillan’s email goes

on to state:655

The preference is to progress the Hume and Iser site as an Oxygen site, as this

site is in a better location and I believe would be supported by Council.

Council are extremely supportive of Oxygen coming to Bendigo, however not

on the currently proposed site in Bendigo. I think that Council would be

extremely supportive of us doing a development with Hume & Iser and this

scenario was even brought up by the Head of Planning at Bendigo Council. I

think it could be a good outcome for Council for us to abandon the proposed

location (we could use this as leverage) and work with Hume and Iser on their

site and I am sure that they would consider supporting a road closure. The

Council are quite competitive with Ballarat and Geelong and do not want to

miss out.

(f) By 24 April 2010 Mr Danks had said to Mr Iser that: “Woolworths are very

keen to discuss further your plans to develop the [Hume & Iser] site sometime

in the future”.656

(g) By 30 April 2010 Mr Macmillan had sent Mr Iser a confidentiality and

exclusive dealing agreement with an exclusive dealing period of six months

and a three month extension.657

(h) The minutes of the Property Committee meeting on 4 May 2010 stated that:

652 Court Book 3141. See also Court Book 3138. 653 Court Book 3348, 3357. 654 Court Book 3351, 3355. 655 Court Book 3422 (Plaintiff’s emphasis). 656 Court Book 4685. 657 Court Book 3427, 4688.


“Deal on Bendigo will fall over. Pursuing alternative site”.658 No Matters

Arising Log has been discovered in relation to this meeting.

222 The position at this stage was that unless Woolworths had decided to abandon the

Bendigo site the strategy of pursuing the acquisition of the “alternative” Hume &

Iser store was inconsistent with Woolworths’ Property Committee decision that

Woolworths would pursue only one store in Bendigo.659 Woolworths did not

contend that it intended to pursue both sites in Bendigo. Indeed, to do so would

have been contrary to Woolworths’ Home Improvement Strategy which

contemplated Woolworths protecting and growing Danks’ key Home Timber &

Hardware store customer base660 and avoiding or minimising competition, which

was described as a “clash of trade” or “cannibalisation”, between Oxygen and trade

focussed retail stores.661 As the evidence referred to in the preceding discussion

indicates, Woolworths then actively pursued the acquisition of the Hume & Iser site

for several years before negotiations broke down.

223 Mr Macmillan’s evidence to the effect that he advised Mr Champion the Agreement

for Lease could not be terminated in order to pursue the Hume & Iser store and that

his advice somehow altered the Property Committee’s decision, which was then re-

made on a different basis once no agreement could be reached on the Landlord’s

Works Costs,662 does, in my view, lack credibility and is inconsistent with the

contemporaneous documents which show no such change in the position by the

Property Committee;663 with the reason for the decision remaining unchanged in the

Matters Arising Log throughout.664 I accept that Mr Macmillan’s evidence that the

Hume & Iser store was only considered as a potential site for a Masters store after

the meeting on 22 April 2010,665 is equally incredible in light of the contemporaneous

documents, including the Minutes and Matters Arising Logs of the Property

658 Court Book 3435. 659 Court Book 1231. 660 Court Book 4722, 4724, 4738. 661 Court Book 4724. 662 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [85]. See also Transcript 902–3. 663 Court Book 3141, 3153. 664 Court Book 3138, 3141, 3153, 3142, 3148, 3357, 3348, 3351. 665 Transcript 671.


Committee. The suggestion that Mr Macmillan formed the views set out in his email

to Mr Danks on 23 April 2010 in less than 24 hours after the 22 April 2010 meeting, is

also inherently implausible.666 Moreover, to the extent that Mr Macmillan’s evidence

contradicts the formal Minutes and Matters Arising Logs of the Property Committee,

this evidence is rejected. Moreover, the position that Woolworths chose not to call

Mr O’Brien or any attendee at the 9 March 2010 meeting which led to the Property

Committee decision to pursue the alternative site to give evidence in the proceeding

without any explanation also supports the inference, open on the Minutes and

Matters Arising Logs, that a decision had been made by Woolworths to pursue the

Hume & Iser site by at least 16 March 2010.667

224 Following the termination of the Agreement for Lease by Woolworths, the

negotiations carried on between Woolworths, Mr Danks and Mr Iser:

(a) By 30 June 2010, not long after the termination of the Agreement for Lease by

Woolworths, Woolworths had obtained the financials of the Hume & Iser

business from Mr Iser. Mr Hunt of Woolworths referred to the Hume & Iser

business as the “business we intend to [b]uy, excluding land, the owner will

develop for us in the future. Bunnings is also looking at the business … Can

we calculate a purchase price”;668

(b) By early August 2010 a valuation report had been prepared by Woolworths

valuing the Hume & Iser land and business at $5.225 million;669 and

(c) Between 2010 and 2012 various offers were made to acquire the business.

These offers included:

(i) Offers were made by Hume & Iser to sell the business to Danks670 which

were rejected by Danks;671

666 Court Book 3422. 667 CAJ Investments Pty Ltd v Lourandos (1996) 83 FCR 189 at 198; Jones v Dunkel (1959) 101 CLR 298. 668 Court Book 4712. 669 Court Book 4713. 670 See, eg, Court Book 4754, 4756. 671 Court Book 4758.


(ii) A proposal by which Hume & Iser would run the store until 2015, after

which it would become the Masters Bendigo Store;672

(iii) Offers by Danks to acquire the business and property or for Hume &

Iser to retain the properties and sell the business as a going concern;673

(iv) By December 2011, there was still suspicion that Bunnings was well

advanced in its discussions with Hume & Iser;674

(v) Ultimately by 16 February 2012 the Hume & Iser Board had rejected all

offers from Danks and had resolved not to entertain any further

offers;675 and

(vi) In April 2012, Woolworths was politely asked not to “bother” Hume &

Iser any further. At that time, Woolworths may have identified another

site in Bendigo.676 There is presently no Masters store in Bendigo.

225 For these reasons, I am of the view that in breach of cl 2.2(b) of the Agreement for

Lease, another reason that Woolworths did not take all reasonable steps to identify,

communicate and resolve any differences it may have had in relation to the

Landlord’s Works Costs, was that, before the open book review process could be

completed or any differences identified, the Property Committee had decided, for

strategic reasons, to terminate the Agreement for Lease and pursue the Hume & Iser

site instead. In reaching this position, primary reliance has been placed on

contemporaneous documents. It is a conclusion reached on this basis and not, as

Woolworths contends, the product of characterising the contentions of NES with

respect to this issue as, in effect, allegations of some conspiracy on the part of

Woolworths and various individuals.677

672 Court Book 4759. 673 Court Book 4768, 4774, 4778. 674 Court Book 4770. 675 Court Book 4789. 676 Court Book 4787, 4791. 677 Defendants’ Closing Submissions (3 September 2015) [252]–[260].


Other considerations

226 By the time Mr Macmillan received the NES estimate of the Landlord’s Works Costs

in March 2010, he had become aware of a number of other issues or potential issues

in relation to the development of the Strathdale site, including opposition from the

Council and residents, and potential funding issues with NES. This was also at a

time when Woolworths was faced with having to pay a contribution amount that

exceeded its approved but undisclosed budget678 and at a time when the Property

Committee had decided to pursue an alternative store.679 These matters were

irrelevant to the obligations and powers imposed and conferred on Woolworths

under the Agreement for Lease, but, nevertheless, the evidence does support the

view that they affected the discharge of its obligations under that agreement. NES

cites, by way of example, in this respect the minutes and the Matters Arising Logs of

the Property Committee of 16 March, 6 April, 23 April and 11 May 2010, all of which

pre-date termination of the Agreement for Lease and all of which include the

references “Landlord has funding issues. Alternative site being pursued”680 and

“Council not supportive”.681 Significantly, no reference is made in these documents

to Woolworths and NES being unable to resolve any differences identified in relation

to the calculation of the Landlord’s Works Costs or the Masters contribution.

Greater Bendigo City Council opposition

227 Mr Champion’s notes, dated 6 May 2010, made immediately before the termination

of the Agreement for Lease, record, that: “The grounds are that the parties have not

reached agreement on cost of building. Reality is that Council will not support that

site.” The note then stated: “The Hume and Iser site is the larger & successful Home

Hardware … very interested in selling to us”.682 This note is consistent with the

notations in the Woolworths Corporate Property Reports which also noted Council

opposition.683

678 Court Book 4490. 679 Court Book 3138, 3141. 680 Court Book 3138, 3141, 3351. 681 Court Book 4682, 4702. 682 Court Book 4046. 683 Court Book 4682, 4702.


228 NES contends that it is open to the Court to find, and the Court should find, that in

addition to the approved budget and the decision to pursue the Hume & Iser site,

Woolworths also took into account that there was opposition from the Council in

performing its obligations under the Agreement for Lease, including exercising its

power to terminate the Agreement for Lease and without first having identified,

communicated and sought to resolve any differences Woolworths may have had in

relation to the calculation of the Landlord’s Works Costs and the Masters

contribution amount.

229 Mr Champion did, however, seek to explain the 6 May 2010 note on the basis that

the use of the word “reality” meant “in any case” or “in addition to”.684 However, as

submitted by NES, this is not an interpretation open on the plain language of the

handwritten note and, NES submits, does Woolworths little credit and should be

rejected. Further, it is submitted that the meaning of Mr Macmillan’s

contemporaneous handwritten note is clear—the “real” reason for Woolworths

terminating the Agreement for Lease was not any inability to reach agreement on

commercial terms, but that the Council would not support the Bendigo development

in circumstances where the larger, more successful, Hume & Iser store—which the

Council did support—had already been identified and a decision made by

Woolworths to pursue that store. Mr Champion admitted that any lack of Council

support was not a valid reason for terminating the Agreement for Lease.685

Mr Champion did say, however, in his evidence that Council approval was not part

of the reason for “pulling” the Bendigo site.686 This is, however, as NES submits,

contrary to the contemporaneous documentary evidence and clearly at odds with

the plain words of the contemporaneous note of Mr Champion dated 6 May 2010.687

Accordingly, I find that Woolworths did take into account Council opposition in

performing its obligations under the Agreement for Lease, including exercising its

power to terminate the Agreement for Lease. In other words, the inferences in this

684 Transcript 1206, 1209–10. 685 Transcript 1217. 686 Transcript 1214. See also Court Book 4046. 687 Cf Defendants’ Closing Submissions (3 September 2015) [292]–[296].


respect should be made as submitted by NES.

Financial position of NES

230 NES submits in this respect that the references to “Landlord has funding issues” in

the Minutes and Matters Arising Logs of the Property Committee to which reference

has been made indicate that Woolworths also took into account—in discharging its

obligations and exercising its powers under the Agreement for Lease—a

misperception that NES may have had funding issues. For the reasons which follow,

and having regard to the evidence to which reference is made, I am of the opinion

that this is correct.

231 The concerns with respect to NES’s funding issues appear to stem from an email sent

by Mr Blake to Mr Macmillan, stating that they should “talk about financing this

development at some stage.”688 In order to obtain a clearer picture of the nature of

this communication—the import of this quoted passage—the context of the email of

16 November 2009 in which it appears should be considered. Omitting formal parts,

the contents of that email are as follows:689

Just to advise that I have today received the contract from the vendors lawyers for 203 McIvor Rd. My lawyer is pleased with the docs.

I’ve briefly read the contract tonight and all looks to be in order. I’ll check it again in detail and if all is well, sign this week.

My lawyers are pushing the vendor of 201 and she is being assisted in her decision by her family...! [Her] lawyer understands the urgency and we have asked for contracts to be signed this week.

Tim, obtaining finance for projects like this is becoming increasingly difficult in the current climate. Banks and financiers are very nervous. The Woolworths model is untested and may raise other issues as we apply for development finance.

Let’s talk about financing this development at some stage.

It should be remembered, of course, that 16 November 2009 was around the time of

the aftermath of the global financial crisis, so it is not surprising that there should be

some reference to difficulties in obtaining finance for development projects.



232 In any event, the evidence of Mr Blake and Mr Macmillan differed significantly in

relation to this question. Mr Blake’s evidence was to the effect that he had asked

Mr Macmillan once whether Woolworths would consider funding the Strathdale

development, but when Mr Macmillan said “no”, there was no further discussion of

this topic. Mr Blake’s evidence was that he asked Mr Macmillan whether

Woolworths would be prepared to fund the development, not because NES could

not obtain funding elsewhere, but because Woolworths may have been prepared to

provide the funding without the need for cross-collateralised securities, as

Woolworths had done in the past for a development at Kennington Village.690

Mr Macmillan’s evidence, on the other hand, at least his oral evidence, was to the

effect that Mr Blake had asked several times whether Woolworths would fund the

development and that he had said to him that NES was having funding issues.691 As

NES observes in its submissions, why Mr Blake would have told Mr Macmillan this

long before funding was needed for the development, when Mr Blake was confident

that the Bendigo Bank would fund the development, which Mr McGregor and

Mr Stockwell of that Bank confirmed in their evidence, make this evidence by

Mr Macmillan implausible, to say the least. Moreover, it also would seem a very

unlikely comment from someone in Mr Blake’s position who was seeking to pursue

a development with a corporation such as Woolworths in circumstances where his

ability, and the strength and capacity of his corporate entities would likely have been

a factor which Woolworths would have considered before entering into agreements

with him.

233 In any event, to the extent that it is necessary to make a finding in relation to this

issue, I am of the opinion that “on the grapevine”, Mr Macmillan became aware that

there had been an issue with another development between Mr Blake and

Woolworths, Kennington Village692 which had resulted in another entity associated

with Mr Blake defaulting on a loan from Woolworths and the development being

acquired and completed by Woolworths. Mr Macmillan wrongly assumed that the

690 Transcript 185. 691 Transcript 899, 1177. 692 Transcript 1173.


issues with that development were caused by NES experiencing financial difficulties.

In actual fact, Mr Blake did not complete the Kennington Village development as he

was unable to obtain the planning approvals necessary to construct the

development.693 There were also communications with respect to whether the

Agreement for Lease was related to or otherwise dependent on other transactions

between Mr Blake’s companies and Woolworths; including with respect to a

property in Redan (in Ballarat). Woolworths asserted no relationship or dependence

and these matters were carried no further—and do not impinge on the present issues

or discussion.694

234 It also seems likely, as NES submits, that Mr Macmillan’s concerns about the ability

of NES to obtain funding may also have been relevant to the decision by

Woolworths to pursue the Hume & Iser store695 and may have prompted

Woolworths to obtain legal advice about their position in relation to the negotiations

with NES.696 Finally, I am of the opinion that one of the most telling points in

relation to this particular issue is that, despite any concerns which Mr Macmillan

and Woolworths now say they had, there is no evidence of any attempt being made

by Woolworths to verify the financial position of Mr Blake or NES.697 It is almost

inconceivable that a corporation such as Woolworths, if it had any real concern in

relation to the financial capacity of an entity with which it was dealing, would not

make any inquiries to attempt to verify the financial position of that entity.

235 Concluding in relation to this issue, whether or not Mr Macmillan’s fears about

NES’s financial position were genuinely held,698 this was not a matter that

Woolworths was entitled to take into account when exercising its powers and

performing its obligations under the Agreement for Lease. It was a matter for

Woolworths to assess before entering into the Letter of Offer and the Agreement for

693 Transcript 187. 694 See Court Book 2854, 2856, 3072. See also Defendants’ Closing Submissions (3 September 2015) [194]–

[200]. 695 Transcript 1176. 696 Court Book 3138. See also Transcript 1176. 697 Transcript 736, 1175–7. 698 See Defendants’ Closing Submissions (3 September 2015) [194]–[213].


Lease and, on the evidence, Woolworths clearly entered into those agreements with

no such concerns. Neither does it affect the position in the present proceedings that

Mr Blake may have expressed an interest in selling the Strathdale site and

communicated with potential purchasers (including Bunnings)—quite apart from

the suggestion, made at the 22 April 2010 meeting, that it might be sold to

Woolworths—there being no evidence that NES did or intended to act contrary to

the terms of the Agreement for Lease. Moreover, in the absence of any evidence of

any act or intention contrary to the Agreement for Lease, there is no basis for the

contention by Woolworths that there is any basis to impugn negotiations or conduct

by Mr Blake on behalf of NES with respect to the process as required under cl 2.2 of

that agreement.699

Agreement for Lease terminated by Woolworths for reasons not contemplated by its terms

236 As discussed in the preceding reasons, it is clear on the contemporaneous

documentary evidence that well before the open book review of the Vaughan

Constructions estimate had been completed on 1 April 2010, and well before

negotiations between NES and Woolworths to resolve any differences in relation to

the Landlord's Works Costs were to have been completed (on 20 April 2010, then

extended), Woolworths had decided to terminate the Agreement for Lease and to

pursue the acquisition of the Hume & Iser site.

237 The reasons for Woolworths termination of the Agreement for Lease were recorded

in Woolworths’ own internal documents as follows:

(a) The Minutes of the Property Committee (of which Mr O’Brien and Mr

Champion were members) and the Matters Arising Log for 16 March 2010

state that: “Landlord has funding issues. Alternative site being pursued.

Check the legal position in relation to negotiations on site.”700

(b) The Minutes of the Property Committee on 6 April 2010 state that: “deal likely

699 See Defendants’ Closing Submissions (3 September 2015) [210]–[211]. 700 Court Book 3138, 3141, 3143, 3153, 3142.


to [fall over]”.701 The Matters Arising Log states: “Landlord has funding

issues. Alternate site being pursued. Check legal position in relation to

negotiations on site.”702

(c) The table setting out the status of the various sites dated 23 April 2010 records

a 41 to 60 per cent likelihood of completion on 23 April 2010 with the added

notation: “Council not supportive”.703

(d) The Minutes of the Property Committee on 4 May 2010 state that: “Deal on

Bendigo will fall over. Pursuing alternative site.”704 No Matters Arising Log

has been discovered.

(e) On 11 May 2010 the table setting out the status of the various sites continued

to report a 41 to 60 per cent likelihood of completion stating the reason:

“Council not supportive.”705

(f) The email from Mr Macmillan and Mr Danks on 23 April 2010, referred to

above states:706

The agreement for the Oxygen site at Bendigo expires on 4 May. Oxygen is willing to walk away from the site for the following reasons:

Council are not supportive of the Home Improvement use on the McIvor Hwy site. They wish to have the site rezoned to residential.

There will be significant resistance to the proposal from the abutting residential community (including the Federal member of parliament)

The developer has optioned up the land for too much money, has funding issues and we cannot agree on finalising commercial terms.

The preference is to progress the Hume and Iser site as an Oxygen site, as this site is in a better location and I believe would be supported by Council.

Council are extremely supportive of Oxygen coming to Bendigo, however not on the currently proposed site in Bendigo. I think that Council would be extremely supportive of us doing a development with Hume & Iser

701 Court Book 3348, 3435. 702 Court Book 3351, 3355. 703 Court Book 4682. 704 Court Book 3435. 705 Court Book 4702. 706 Court Book 3422.


and this scenario was even brought up by the Head of Planning at Bendigo Council. I think it could be a good outcome for Council for us to abandon the proposed location (we could use this as leverage) and work with Hume and Iser on their site and I am sure that they would consider supporting a road closure. The Council are quite competitive with Ballarat and Geelong and do not want to miss out.

(g) Mr Champion’s handwritten notes from the day of termination stated:707

Agreement to lease the currently approved site expected to fall over today. The grounds are that the parties have not reached agreement on cost of building.

Reality is that Council will not support that site. Landlord offered to sell for $6.3m ~ 500k margin. We have politely declined.

The Hume and Iser site is the large & successful Home Hardware—very interested in selling to us …

Notwithstanding the passing reference in Mr Macmillan’s email of 23 April 2010 and

in Champion’s handwritten note to agreement on commercial terms, it is clear from

these documents, which pre-date any termination, that Woolworths had decided to

terminate the Agreement for Lease for reasons other than any genuine disagreement

about the amount of the Landlord’s Works Costs. It is also telling that each of the

reasons to which reference has been made—save for the passing references by Mr

Macmillan and Mr Champion—arose before the review of the Vaughan

Constructions quote had been completed and before any negotiations had taken

place. So, too, had the decision of the Property Committee to pursue the Hume &

Iser site. In any event, Woolworths was not entitled to terminate the Agreement for

Lease on any of these bases, matters to which I now turn in some further detail.

238 NES submits that it is open to the Court to find on the evidence, and that the Court

should find, that each of the matters which have been discussed in the preceding

reasons, including that the Masters contribution was likely to exceed Woolworths’

approved but undisclosed budget, that the Property Committee had decided to

pursue the Hume & Iser store, that the Council was not supportive of the Bendigo

development and that there were fears that NES may be experiencing funding

issues, were all matters that Woolworths took into account in deciding to terminate



the Agreement for Lease. For the preceding reasons and for those which now

follow, I am of the view that the findings contended for by NES are properly made.

239 In support of its contention, NES says that the fact this was the case is evident from

the email from Mr Macmillan to Mr Danks on 23 April 2010, which, is set out in full

above.708 As indicated in the preceding reasons, these were not issues that

Woolworths was permitted to take into account in performing its obligations or

exercising its powers under the Agreement for Lease, but the evidence is that it did

so, and this email reinforces that assessment.

240 In his oral evidence, Mr Macmillan sought to draw a distinction between the reasons

Woolworths decided to reject the offer of NES at the 22 April 2010 meeting to sell the

Strathdale site to Woolworths, rather than the reasons for Woolworths terminating

the Agreement for Lease.709 However, in the context of the evidence which has been

considered, this distinction is simply not credible and, in my view, is an attempt to

rationalise and justify the decision for termination of the Agreement for Lease in

circumstances where these extraneous considerations were treated by Woolworths

as relevant matters with respect to that decision.

241 As has been discussed in the preceding reasons, the contemporaneous documentary

evidence suggests that Woolworths considered it likely, if not inevitable, that

negotiations with NES would fail well before the open book process was completed

or any such negotiations had taken place. This is reflected in repeated comments in

the Minutes of the Property Committee that the deal is “likely to fall over”.710

Despite the assertion that these Minutes may be inaccurate,711 Mr Champion

confirmed that the Property Committee held the view expressed in the Minutes at

that time.712 Mr Champion’s evidence that these entries followed conversations with

Mr Macmillan in March 2010 in which Mr Macmillan reported to him that

708 See above [237(f)]. 709 Transcript 939. 710 Court Book 3348, 3435, 3357. 711 Transcript 938. 712 Transcript 1203.


negotiations were not progressing well713 suggests that the negotiations in question

were not negotiations between Woolworths and NES, as Mr Macmillan admitted

that no such negotiations had yet taken place.714 If the progress of any such

“negotiations” was in fact the origin of these entries, the negotiations in question can

only have been negotiations between Woolworths and Rider Hunt on the one hand,

and Vaughan Constructions on the other, to try and bring the construction costs

within Woolworths’ approved but undisclosed budget. NES had no involvement in

any such negotiations, nor were they negotiations contemplated by the Agreement

for Lease; which made no reference to the Woolworths budget. Consistent with such

an inference, Mr Champion’s evidence was that, if Mr Macmillan formed the view

that he could not achieve a deal within the parameters prescribed by the Property

Committee, including the $1.7 million budget, “there was no obligation for him to

continue to do so.”715 Mr Champion’s evidence was that in such circumstances, Mr

Macmillan was authorised to terminate the Agreement for Lease, without referring

that decision to the Property Committee.716

Conclusion in relation to liability

242 Woolworths was not free to terminate the Agreement for Lease to pursue the

acquisition of an alternative site, having agreed to lease the Masters store from NES

at a price that was based on the price to construct the store to Bunnings’

specifications and having agreed to pay the difference between that cost and the

actual cost to construct a Masters specification in a lump sum, once known. In my

opinion, it is clear that Woolworths knew very well, both for the reasons discussed

in the preceding reasons and from advice it sought from its solicitors following the

decision of the Property Committee to pursue the Hume & Iser site,717 that it was not

free to terminate the Agreement for Lease under cl 2.2(c) unless it had first acted

reasonably and in good faith to resolve any differences it may have had in relation to

713 Outline of Evidence of Richard Charles Douglas Champion (27 February 2015) [21]. 714 Transcript 913. 715 Transcript 1085. 716 Transcript 1148. 717 Court Book 3138, 3141, 3351.


the estimate by NES of the Landlord’s Works Costs or the Tenant’s contribution to

those costs and no agreement could be reached.

243 On its proper construction, having regard to the terms of the Agreement for Lease

and the factual circumstances in which it was entered into, cl 2.2 of the Agreement

for Lease is not an agreement merely to negotiate. It is an agreement to act

reasonably and in good faith in an attempt to resolve differences in relation to the

estimate by NES of the Landlord’s Works Costs. Clause 2.2 was a mechanism by

which the parties agreed to act reasonably and in good faith, that is, with the joint

object of resolving any differences that may be identified, to determine the actual

cost to construct a store to Masters’ specifications so that Woolworths could meet the

difference between that cost and the cost on which the lease amount had been based.

It is not a clause that permitted Woolworths to terminate the Agreement for Lease if

that cost exceeded some undisclosed budget on the part of Woolworths, or if issues

arose with respect to the development or if it decided to pursue other alternative

options.

244 In my view, it is clear, as is submitted by NES, that a reasonable person, in the

position of Woolworths, which had the object of identifying and resolving

differences in the calculation of the Landlord’s Works Costs in mind, but no other

object, would have, at a minimum:

(a) Invited NES to attend and participate in the open book review process and

encourage its involvement, so that NES would be informed of any differences

identified during that process and be better able to resolve them;718

(b) Informed NES of any differences it had identified in relation to the calculation

of the Landlord’s Works Costs and Masters’ contribution and of any other

expectations Woolworths’ may have had in relation to those costs;719

(c) Communicated to NES the basis of any conclusion that the Landlords’ Works

718 Transcript 1184–5. 719 Transcript 959–60, 1044–5.


Costs or Masters’ contribution were “too high” or “unacceptable”,

particularly where the estimate provided was a detailed estimate from an

experienced builder whose estimates were known to be reliable from other

tenders;720

(d) Assisted NES in identifying and obtaining quotes from alternative builders;721

(e) Provided NES with any documentation, such as reports prepared by Rider

Hunt, that identified the differences and the basis of the differences

Woolworths had identified;722

(f) Read, considered and communicated to NES the contents of the Rider Hunt

report of 22 April 2010, assuming Woolworths sought to rely on that report as

identifying any differences between it and NES in relation to the calculation

of the Landlord’s Works Costs and Masters’ contribution;723

(g) If—as Woolworths submits but NES rejects—the open book process had not

been completed, adjourned or postponed the negotiations, if necessary, until

the open book process had been completed and any differences identified and

to enable all parties to consider any reports relied upon by the parties.724

I accept that only then could any constructive negotiation to resolve any differences

have taken place; a position which was admitted by Mr Macmillan.725 On any view,

on the evidence, Woolworths failed or refused to take any of these reasonable steps

before terminating the Agreement for Lease.

245 The only evidence of any attempt by Woolworths to negotiate the contribution

amount, as distinct from attempting to resolve differences in relation to that amount,

is a reference in the notes of Mr Graves of the 22 April 2010 meeting to the effect that

720 Such as the successful tenders for (Court Book 4795) Burnside, Coolaroo, (Court Book 4694) South

Morang, Dandenong and Keysborough. 721 Outline of Evidence of Timothy Stuart Macmillan (27 February 2015) [184]–[185], [220]. 722 Transcript 717, 847, 915. 723 Transcript 717, 868–9. 724 Transcript 961, 1061–2. 725 Transcript 1191.


Mr Macmillan said that Woolworths expected a contribution amount of around

$1 million.726 Mr Macmillan could not, however, recall whether he made such a

statement.727 If he did, this statement cannot have been an attempt to identify or

resolve “differences” Woolworths may have had in relation to the calculation of the

Landlord’s Works Costs, as contemplated by cl 2.2 of the Agreement for Lease, as the

$1 million amount bore no relationship to any differences that had been identified

with respect to the NES estimate of Landlord’s Works Costs. If Woolworths ever

had an expectation that the amount of the Masters contribution may be around

$1 million,728 any such expectation cannot have survived the detailed estimate

provided by Vaughan Constructions on 1 March 2010729 or the Rider Hunt estimate

of $2.94 million provided to Woolworths following the open book review process.730

Even the revised Rider Hunt estimate of $1.5 million provided to Mr Macmillan on

the morning prior to the 22 April 2010 meeting,731 which was not read or considered

by Woolworths or communicated to NES732 and which contained variations and

errors, far exceeded that amount. So, too, did the approved budget of $1.7 million

set in July 2010.733 Consequently, as the $1 million amount did not represent the

result of any genuine “difference” with the estimate provided by NES, any such

statement only reinforces the inference that Woolworths had no desire or intention at

that stage to resolve any real differences with NES in relation to the Masters

contribution. At best, the statement could have been a misunderstanding of what

cl 2.2(b) of the Agreement for Lease required, and the false assumption that

Woolworths was free to negotiate any contribution amount. At worst, it was a

deliberate attempt to create a disagreement that could be relied on to terminate the

Agreement for Lease. Moreover, it was not permissible for Woolworths to take into

account, in negotiating to resolve differences in relation to the NES estimate of the

Landlord’s Works Costs, the undisclosed budget set by the Property Committee on

726 Transcript 1069. 727 Transcript 868. 728 Transcript 693, 701. 729 Transcript 1069–70. 730 Court Book 3345. 731 Court Book 4236. 732 Transcript 1056. 733 Court Book 1212.


22 July 2009.734 That budget was set well before a design kit had been finalised, well

before the true cost differences between a Bunnings store and a Masters store were

known, well before the open book process to ascertain the actual cost of constructing

the Bendigo store had begun, and was set without any reference to the estimate

provided by NES.735 The differences that cl 2.2(b) of the Agreement for Lease

contemplated the parties would seek to resolve were differences in relation to the

calculations and assumptions on which the NES estimate of the Landlord’s Works

Costs were based, not differences between that estimate and an undisclosed budget

set without reference to the actual cost of constructing the Masters store.

246 Having rejected the NES estimate as being “too high” or “not acceptable”,

Woolworths then purported to rely on the lack of agreement of its own creation as a

basis for terminating the Agreement for Lease. It did so, as discussed in the

preceding reasons, for a variety of reasons that had nothing to do with any inability

to resolve differences in relation to the calculation of the Landlord’s Works Costs by

NES, including opposition by the Council and a decision of the Property Committee

to pursue an alternative site. In my view, for these reasons, it is clear that not only

did Woolworths fail to act reasonably to resolve differences in relation to the

Landlord’s Works Costs, but it acted in bad faith by acting on matters which were

not contemplated by the Agreement for Lease. It is in this context, and only in this

context, that the contemporaneous Woolworths’ documents referring to the deal

being likely to “fall over”, well before negotiations had taken place, and the decision

to pursue an “alternative” site, as well as Mr Champion’s handwritten note and

Woolworths’ otherwise anomalous conduct leading up to the termination of the

Agreement for Lease make any sense. It is not the conduct of a party acting

reasonably with the sole object of identifying and resolving differences in mind.

247 In conclusion, for the preceding reasons, I do find on the evidence that Woolworths,

in breach of cll 2.2(b) and (c) of the Agreement for Lease, did not act reasonably and

in good faith to resolve differences in relation to the estimate of the Landlord’s

734 Court Book 1212. 735 Transcript 1147–9.


Works Costs by NES and terminated the Agreement for Lease for reasons that were

not permitted under the agreement.

248 In reaching this overall position, I emphasise that it has been reached—and in all its

aspects—as a result of primary reliance on contemporaneous documents. It is also a

conclusion—and, again, in all its aspects—reached on this basis and is not, as

Woolworths contends, the product of characterising the contentions of NES with

respect to any aspect of matters as, in effect, allegations of some conspiracy on the

part of Woolworths and various individuals. Consequently, issues as to the

standard of proof of conspiracy or the reliance by NES on inferences do not arise.736

Loss and damage

Applicable principles

249 The principles applicable to the assessment of damages for breach of contract were

summarised by Jagot J in Haviv Holdings Pty Ltd v Howards Storage World Pty Ltd as

follows at:737

(1) In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd,738 the High Court said that the “ruling principle”, confirmed in this court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman:739

The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

(2) The same principle has been stated as follows:740

The general principle governing the assessment of compensatory damages in both contract and tort is that the plaintiff should receive the monetary sum which, so far as money can, represents fair and adequate compensation for the loss or injury sustained by reason of the defendant's wrongful conduct. The application of that general principle ordinarily involves a comparison, sometimes implicit, between a hypothetical and an actual state of affairs: what relevantly represents the position in which the plaintiff would have been if the wrongful act (i.e. the repudiation

736 Cf Defendants’ Closing Submissions (3 September 2015) [261]–[291]. See also Transcript 1480. 737 (2009) 254 ALR 273 at 281–4 [27] (emphasis in original and citations omitted). 738 (2009) 236 CLR 272 at 285–6 [13]. 739 (1848) 1 Ex 850 at 855. 740 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 116.


or breach of contract or the tort) had not occurred and what relevantly represents the position in which the plaintiff is or will be after the occurrence of the wrongful act.

(3) The loss for which compensation is claimed must not be too remote. The remoteness criterion is determined by reference to the so-called rule in Hadley v Baxendale, according to which a loss caused by a breach of contract is not too remote if it:741

may fairly and reasonably be considered either [as] arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract, as the probable result of the breach of it

(4) Further:742

An important matter in ascertaining whether the loss or damage is too remote is the extent to which the parties may be taken to have contemplated the events giving rise to that loss or damage. The parties need not contemplate the degree or extent of the loss or damage suffered. Nor need they contemplate the precise details of the events giving rise to the loss. It is sufficient that they contemplate the kind or type of loss or damage suffered.

(5) Although damage is not an element of a cause of action for breach of contract, “a plaintiff bears the onus of establishing the extent of his loss or injury on the balance of probabilities. To satisfy the requirements of that rule, a plaintiff must, if he is to recover more than a nominal amount in such an action, affirmatively establish assessable damage, that is to say, loss or injury which is capable of being measured in monetary terms.”743

(6) However, it “is irrelevant to inquire whether the defendants’ default was the dominant, effective or real cause of the plaintiff's loss. If the evidence is suggestive of multiple causation, the inquiry to be made is whether the defendants’ default was a cause of the plaintiff’s loss. The test of causation poses the question whether the plaintiff’s loss would not have been suffered but for the defendants’ default. The question is to be answered by applying that test in a practical common sense way.”744 Hence, the “but for” test is not “the exclusive test of factual causation.”745

(7) Where an intervening event arises “the intervention will not have the effect of terminating the defendants’ responsibility for the loss caused by it, if the parties should have contemplated at the time of the contract that in the event of the sort of breach which did occur an intervention of that general kind was a serious possibility or a not

741 (1854) 9 Ex 341 at 342. See also Nick C Seddon, Rick A Bigwood and Manfred P Ellinghaus, Cheshire

& Fifoot Law of Contract (LexisNexis Butterworths, 10th ed, 2012) 1165–9 [23.39]. 742 Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 365–6 (citations omitted). 743 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 118. 744 Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 315 [4]–[5] (emphasis in original

and citations omitted). See also at 350. 745 Chappel v Hart (1998) 195 CLR 232 at 243 [24].


unlikely occurrence.”746

(8) It has also been said that, while the plaintiff has the onus of showing loss caused by the breach, “if the loss in question is the apparent or likely result of the breach, the onus shifts to the contract-breaker to prove that it was not”.747 Further, in Henville v Walker McHugh J said (albeit in a trade practices context) “[a]rguably, once a plaintiff demonstrates that a breach of duty has occurred that is closely followed by damage, a prima facie causal connection will be established. It is then for the defendant to show that the plaintiff should not recover damages. In the words of Dixon CJ in Watts v Rake,748 it is the defendant who must disentangle, so far as possible, the various contributing factors.”749

(9) The rule that a “defendant is not liable in damages for not doing that which he or she has not promised to do is necessarily subject to the rule in Hadley v Baxendale.750 According to Alderson B’s renowned formulation, the plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach.751”752 Hence, loss of the prospect of securing a renewal of contract may be within the contemplation of parties as probable result of breach.

(10) Accordingly, as was stated in Malec v JC Hutton Pty Ltd per Deane, Gaudron and McHugh JJ:753

When liability has been established and a common law court has to assess damages, its approach to events that allegedly would have occurred, but cannot now occur, or that allegedly might occur, is different from its approach to events which allegedly have occurred. A common law court determines on the balance of probabilities whether an event has occurred. If the probability of the event having occurred is greater than it not having occurred, the occurrence of the event is treated as certain; if the probability of it having occurred is less than it not having occurred, it is treated as not having occurred. Hence, in respect of events which have or have not occurred, damages are assessed on an all or nothing approach. But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the court is different. The future may

746 Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 315 [11] citing Koufos v C

Czarkinow Ltd [1969] 1 AC 350. 747 Nick C Seddon, Rick A Bigwood and Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract

(LexisNexis Butterworths, 10th ed, 2012) 1159 [23.34] citing Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516.

748 (1960) 108 CLR 158 at 160. 749 (2001) 206 CLR 459 at 507 [148]. 750 Hadley v Baxendale (1854) 9 Ex 341. 751 Hadley v Baxendale (1854) 9 Ex 341 at 354. 752 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 91–2 (citations omitted). See also at 102–

3. 753 (1990) 169 CLR 638 at 642–3 (citations omitted). See also the reasons of Brennan and Dawson JJ at

639–40.


be predicted and the hypothetical may be conjectured. But questions as to the future or hypothetical effect of physical injury or degeneration are not commonly susceptible of scientific demonstration or proof. If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high—99.9 per cent—or very low —0.1 per cent. But unless the chance is so low as to be regarded as speculative—say less than 1 per cent—or so high as to be practically certain—say over 99 per cent—the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability. The adjustment may increase or decrease the amount of damages otherwise to be awarded. The approach is the same whether it is alleged that the event would have occurred before or might occur after the assessment of damages takes place.

(11) The statement in Malec v JC Hutton Pty Ltd754 has been further explained as follows:755

In Malec v JC Hutton Pty Ltd, this Court drew a distinction between, on the one hand, proof of historical facts—what has happened—and, on the other hand, proof of future possibilities and past hypothetical situations. The civil standard of proof applies to the first category but not to the second, particularly when it is necessary to determine future possibilities and past hypothetical situations for the purpose of assessing damages.

(12) The general rule is that damages are assessed at the date of breach of contract but “this rule is not universal” and “must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered”.756 This is consistent with the approach that rules which constitute “useful guidance in the ascertainment of damages” should not be treated “as rigid rules of universal application” incapable of being “displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation for a breach of contract without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept.”757

(13) The general rule that damages are usually assessed at the date of breach of contract does not mean that events that have occurred after

754 (1990) 169 CLR 638. 755 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 350 (citations omitted). 756 Johnson v Perez (1988) 166 CLR 351 at 355–6. 757 Wenham v Ella (1972) 127 CLR 454 at 466. See also Commonwealth v Amann Aviation Pty Ltd (1991) 174

CLR 64 at 119.


that date may never be considered.758

(14) Further, “[w]here there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat the only remedy it provided for breach of contract, an award of damages.”759

250 The principles applicable where the case involves the loss of a commercial

opportunity were summarised by Hargrave J in Fenridge Pty Ltd v Retirement Care

Australia (Preston) Pty Ltd as follows:760

214 The legal principles to be applied in determining whether a loss of commercial opportunity is compensable were stated by the High Court in Sellars v Adelaide Petroleum NL.761 Mason CJ, Dawson, Toohey and Gaudron JJ distinguished between proof of causation and proof of damages, stating that proof of causation is to be determined on the balance of probabilities as to whether a plaintiff has sustained some loss or damage,762 and, if that hurdle is crossed, that the amount of that loss or damage is to be ascertained by reference to the Court’s assessment of the degree of probabilities or possibilities.763 These conclusions were expressed in the following terms:764

[W]e consider that acceptance of the principle enunciated in Malec v JC Hutton Pty Ltd requires that damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s 52(1), should be ascertained by reference to the court’s assessment of the prospects of success of that opportunity had it been pursued.765 The principle recognized in Malec was based on a consideration of the peculiar difficulties associated with the proof and evaluation of future possibilities and past hypothetical fact situations, as contrasted with proof of historical facts. Once that is accepted, there is no secure foundation for confining the principle to cases of any particular kind.

On the other hand, the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not

758 Wenham v Ella (1972) 127 CLR 454 at 473. 759 Fink v Fink (1946) 74 CLR 127 at 143. See also New South Wales v Moss (2000) 54 NSWLR 536 at 554

[72]. 760 [2013] VSC 464, [214]–[216]. See also Reading Entertainment Australia Pty Ltd v Burstone Victoria Pty Ltd

[2004] VSC 546, [461]–[462] (emphasis in original). 761 (1994) 179 CLR 332. 762 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355. 763 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355. 764 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355–6 (emphasis in original). 765 (1990) 169 CLR 638.


being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant’s case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.

The conclusion which we have reached on this question finds support in other considerations. The approach results in fair compensation whereas the all or nothing outcome produced by the civil standard of proof would result in the vast majority of cases in over-compensation or under-compensation to an applicant who has been deprived of a commercial opportunity. Furthermore, it is an approach which conforms to the long-standing practice of taking into account contingencies in the assessment of damages.

215 Brennan J delivered a separate judgment in Sellars v Adelaide Petroleum NL.766 He summarised the principles in this way:767

Provided an opportunity offers a substantial, and not merely speculative, prospect of acquiring a benefit that the plaintiff sought to acquire or of avoiding a detriment that the plaintiff sought to avoid, the opportunity can be held to be valuable. And, if an opportunity is valuable, the loss of that opportunity is truly “loss” or “damage” ...

However, a causal relationship between the loss of such an opportunity and the defendant's contravening or tortious conduct must be proved before any issue of the assessment of the amount of the loss arises. ...

To prove the substantiality of a prospect of acquiring a benefit or of avoiding a detriment and what would have been the plaintiff’s actions if the opportunity had been offered, it will usually be necessary to tender evidence to establish the plaintiff’s objectives and the contingencies in the way of their achievement. Evidence of that kind will bear upon both the existence and the value of the lost opportunity.

216 These principles were summarised by Winneke P in Price Higgins & Fidge v Drysdale, in the following terms:768

Where it is alleged that, as a result of negligent conduct, a plaintiff has lost a valuable opportunity, the courts have required the plaintiff to prove, in making good his or her claim, that the negligence has caused the loss of an opportunity of “some” value as distinct from “a negligible prospect”.

While the plaintiff is required to prove to the appropriate standard of proof the existence of a valuable loss of opportunity and the fact that it was caused by the defendant’s negligence, the

766 (1994) 179 CLR 332. 767 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 364–5 (emphasis added by Hargrave J in Fenridge

Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [215]). 768 [1996] 1 VR 346 at 354 (citations omitted).


plaintiff is not required to prove, on the balance of probabilities, the value or extent of the loss because of the difficulties associated with proof of past hypothetical fact situations; in those circumstances the value or extent of the loss is to be ascertained by reference to degrees of possibilities or probabilities. ...

Such principles appear to me to be well settled. But it is apparent from their statement that the existence of the relevant loss, be it a lost commercial opportunity or a prospective physical injury, must be proven by evidence. It seems to me that one cannot simply assume that a plaintiff has lost a valuable opportunity because events supervening upon the defendant’s conduct might suggest that such a loss has occurred. To prove that the loss has, to the requisite standard, occurred and that it has been caused by the defendant’s contravening conduct, the plaintiff is required to demonstrate by evidence not only that the prospect had a real value but also that, if the true position had been disclosed, he or she would have acted to secure the benefit:769

To prove the substantiality of a prospect of acquiring a benefit ... and what would have been the plaintiff’s actions if the opportunity had been offered, it will usually be necessary to tender evidence to establish the plaintiff’s objectives and the contingencies in the way of their achievement. Evidence of that kind will bear upon both the existence and the value of the lost opportunity.

251 A number of cases were referred to by Woolworths in its submissions illustrating the

principles to which reference has been made:770

(a) In Joyce v Bowman Law Ltd, the claimant recovered damages for the loss of a

chance to exercise an option to purchase, and redevelop, a residential

property. The court awarded an amount representing 29 per cent of the loss,

having applied discounts for the 85 per cent chance of otherwise possessing a

“watertight option”, 40 per cent chance of funding the development and 85

per cent chance of obtaining planning approval;771

(b) In Jackson v Royal Bank of Scotland plc, the first instance judge, in assessing the

loss of chance to continue a supply agreement, calculated the loss of chance

by adding up, for each of the four years that his Honour found the agreement

would have continued, the chance that the supply agreement would have

769 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 365 (emphasis added by Hargrave J in Fenridge

Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [216]). 770 Defendants’ Closing Submissions (3 September 2015) [372]. 771 [2010] PNLR 22.


continued (57 per cent, 46 per cent, 29 per cent and 16 per cent for each

successive year), and the likely profit for that year;772

(c) In BestCare Foods Ltd v Origin Energy LPG Ltd, the court applied a discount of

45 per cent to reflect the uncertainty that a certain manufacturer would have

exercised options to purchase goods beyond the term of contract and

uncertainty about the volume of sales and the ability of the plaintiff to supply

the goods. That discount was applied to a present value of the likely profit,

reached by applying a discount rate of about 17 per cent;773

(d) In Hart Security Australia Pty Ltd v Boucousis, the Supreme Court of New South

Wales observed, in obiter, with respect to the loss of an opportunity to enter

into a contract, that it would have been appropriate to apply discounts for the

possibility that the contract would not have been entered into, the plaintiff

failing to perform its obligations under the contract and “general economic

conditions and vicissitudes”, resulting in a 40 per cent reduction for the first

five-year term of the contract, and a 60 per cent discount for the contract

extension. These discounts were applied after the net present value of the

contracts had been determined;774 and

(e) In Talisman Property Co (UK) Ltd v Norton Rose, the court applied discounts to

reflect the 70 per cent chance of obtaining against the defendant and a 40 per

cent chance of obtaining the judgment sum from the defendant's insurers, and

held that the claimant lost a 28 per cent chance.775

What was the opportunity lost by NES?

252 It is necessary, in considering the question of lost opportunity, to take as the critical

first step, the identification of the opportunity said to have been lost and to

determine whether, and if so, how, the plaintiff would have acted on that

772 [2005] 1 WLR 377. 773 [2013] NSWSC 1287. 774 (2014) 102 ACSR 557 at 600 [212], 601 [216]. 775 [2006] EWCA Civ 1104.


opportunity. The identification of the opportunity that has been lost, including how

the injured party would have acted on that opportunity, may be critical in

determining what damages will most fairly compensate the injured party for the

wrong that it has suffered.776 Fairness is an issue to be considered with respect to

both parties in conducting this assessment. Thus, as Mason CJ said in Johnson v

Perez, damages in both tort and contract must be fixed so as to give an injured party

the amount in damages that will most fairly compensate that party for the wrong it

has suffered.777 This necessarily involves some balancing in the interests of fairness

to both the injured party and the party at fault.

253 Thus, in assessing loss and damage, the Court must “look at what actually

happened, and … balance the loss and gain”778 in order to obtain what is a “fair and

reasonable result”.779 In this vein, Hayne J said, in Unity Insurance Brokers Pty Ltd v

Rocco Pezzano Pty Ltd:780

Reasonableness informs much of the law of contract and, in particular, the assessment of damages for breach. This means, for example, that if the party wronged has acted reasonably, the wrongdoer may be liable for all the loss that the plaintiff has suffered, even if the plaintiff’s conduct has increased the loss. Conversely, the party wronged is not bound to take all possible steps to mitigate its loss, only those steps which are reasonable.

254 It has also been well established that in determining what damages are necessary to

adequately achieve the goal of accurate compensation, the surrounding

circumstances, including the injured party’s intention, must be considered so as to

do justice between the parties.781 Mason CJ, in Johnson v Perez, addressed this aspect

in some detail:782

Take, for example, a shipload of petroleum destroyed en route to the harbour where it was to be sold the next day. After the intended date of sale, oil

776 As to the principle that damages must be adapted to fairly compensate an injured party for the wrong

he has suffered see Johnson v Perez (1988) 166 CLR 351 at 355–6. 777 (1988) 166 CLR 351 at 355–60. 778 Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [335] quoting British

Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 691.

779 Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [335]. 780 (1998) 192 CLR 603 at 654 [134] (citations omitted). 781 Johnson v Perez (1988) 166 CLR 351 at 360. 782 Johnson v Perez (1988) 166 CLR 351 at 359–60.


prices rise. Because the object is to restore the injured party to the position he would have been in save for the mishap, the court should not necessarily use the date of judgment but rather should consider the use to which the petroleum was to be put. It was to be sold immediately and the damages should reflect the price the injured party would have obtained on the intended date of sale.

This in fact is what the House of Lords did in Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co, a statutory compensation case.783 A waterworks operator had been empowered by a statute to prevent a landowner from working mines on his land if it would interfere with the waterworks. The statute also provided that “full compensation” would be paid in such instances to the landowner. After the issuance of the notice inhibiting mining but within the time necessary to extract the coal, the price of coal rose dramatically. The House of Lords held that the higher price was the appropriate one in assessing the statutory compensation. The Earl of Halsbury LC quoted with approval the words of Phillimore J below: “the true inquiry here is not what is the value of the coalfield or the coal, but what would the colliery company, if they had not been prohibited, have made out of the coal during the time it would have taken them to get it.”784

Admittedly, where the injured party’s intentions are not so patent as in these two examples, the determination of the time at which the injured good would have been converted to currency may present a difficult task. In Hoefle v Bongard & Co Rand J thought there was a conversion in breach of contract of a bailment of shares by the stockbroker bailees.785 In ascertaining the appropriate basis for the assessment of damages, his Lordship said:786

What [the bailor] would have done in the intervening time [between the dates of breach and judgment], if the security had remained, is the speculative basis from which the inferences must be drawn. We cannot say that he would have sold at the highest or at the lowest price or that he would have sold at all. But so far as the circumstances permit, they are to be the ground of conclusions of probability.

As the cases to which I have referred reveal, the principles governing the assessment of damages do not permit the application of rigid rules based on categories of actions. Instead, the injured party’s intentions and the surrounding circumstances must be considered in light of the underlying principles in order to do justice between the parties. Where mitigation is possible, an early date for assessment may be appropriate. Where mitigation concerns are not relevant and the circumstances indicate that the injured party would have maintained possession of the goods had the accident not occurred, the date of judgment is the most appropriate date for assessment. Where the circumstances indicate that the property or interest would in some other way have been converted into monetary terms between the time of injury and date of judgment, the date as at which the injury is assessed should reflect the time of the intended conversion.

783 [1903] AC 426. 784 Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426 at 428. 785 [1945] 2 DLR 609. 786 Hoefle v Bongard & Co [1945] 2 DLR 609 at 620 (citations omitted).


Mason CJ also made it clear that while these observations were made in the course of

considering the general rule for damages in tort, the principles apply equally in cases

of breach of contract.787

255 In the present case, NES submits that it has lost the opportunity to develop and lease

the Strathdale site to Masters pursuant to the terms of the Lease. NES emphasises

that it is that opportunity, and not the opportunity to develop and sell the site to a

purchaser at the date of completion of the development, that it has lost. Having

been deprived of the ability to develop and lease the Strathdale site to Masters, NES

submits that it has lost both the net present value of the stream of net rent it would

have earned under the Lease to Masters plus the net present value of the equity it

would have had in the Strathdale site as at the end of the lease. NES does, however,

accept that the loss should be discounted to its value as at the date of the breach and

must be reduced to account for the savings it has made by not having to develop or

maintain the site up to and during the period of the Lease.788

Would NES have acted on the opportunity had it been offered?

256 It follows from the compensatory nature of common law damages that damages for

loss of opportunity will only be recoverable if, notwithstanding the contravening

conduct, the applicant would have taken the opportunity.789

257 In the present circumstances, NES submits that it is open to the Court to find, and

that the Court should find, that had it been given the opportunity to develop the

Strathdale site into a Masters store and to lease the site to Masters pursuant to the

terms of the Agreement for Lease, it would have done so. Indeed, as NES observes,

it was legally bound to do so under the terms of the Agreement for Lease and the

Lease. Woolworths, on the other hand, contend that the evidence shows that there

was a real probability that NES could not have undertaken the development in any

787 Johnson v Perez (1988) 166 CLR 351 at 356. 788 It is well established that cognate with the compensatory principle, a plaintiff cannot recover more

than he or she has lost: Haines v Bendall (1991) 172 CLR 60 at 63; Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [308].

789 Zoneff v Elcom Credit Union Ltd (1990) 94 ALR 445.


event, on the basis that it would not have obtained the necessary funding from

Bendigo Bank or the planning permissions necessary to proceed with the

development. These are matters which are considered in further detail in the

reasons which follow.

258 Given the course of that consideration, as will be seen, I am of the view that the

evidence does not support the proposition that NES would not have obtained the

necessary funding from Bendigo Bank, nor that the planning permissions necessary

to proceed with the development of the Strathdale site as contemplated by the

parties would not have been obtained. Putting aside these particular matters for the

moment, I am of the view that it is clear NES did intend to develop the Strathdale

site and lease it to Masters, as is clear and self-evident from the terms of the

Agreement for Lease. Moreover, Woolworths was well aware from its past

relationship with NES that NES was in the business of developing and holding

supermarkets and hardware stores, and operating and leasing these stores, but not

selling them. This is evident from the submission made to the Woolworths Property

Committee on 22 July 2009 seeking approval of the Strathdale development. The

submission stated:790

The subject site is owned by Brendan Blake, a property developer and owner of a number of independent supermarkets. Brendan is developing the proposed Woolworths supermarket at Kennington Village and he operates a very successful independent supermarket at Castlemaine. He is also developing the new Bunnings store at Ballarat.

259 For the reasons which follow, I do find that the opportunity NES lost, as a result of

the wrongful termination of the Agreement for Lease by Woolworths, was the

opportunity to develop and lease the Strathdale site to Masters for the duration of

the Lease and not the opportunity to develop and sell that site with the Lease in

place at the completion of the development. I turn now to value this lost

opportunity in order to determine the quantum of damages that will fairly

compensate NES for the loss it has suffered according to the principles which have

been discussed.



Did the opportunity have some (not negligible) value?

260 As is clear from the preceding discussion, in order to establish a claim for loss of

opportunity, NES must prove that the wrongful termination by Woolworths caused

it to lose the opportunity to develop and lease the Strathdale site to Masters and that

this opportunity had some value, that value being calculated by reference to the

degree of probabilities or possibilities.791 As the decision of the Court of Appeal in

Reading Entertainment Australia Pty Ltd v Whitehorse Property Group Ltd indicates, the

correct time for these inquiries is the point at which the conduct causing the loss of

commercial opportunity occurred.792

261 Where the loss claimed by NES is the loss of opportunity to earn the rent promised

under the Lease and the capital appreciation of the land during the term of the

Lease—as is the present position—the Court must be satisfied, on the balance of

probabilities, that were it not for the conduct of Woolworths, NES would have had

an opportunity to obtain that benefit; that NES could, and would, have pursued that

opportunity; and that a benefit would have been yielded.793

262 For the preceding reasons, I am satisfied that but for the conduct of Woolworths,

NES would have had the opportunity to obtain this benefit and would have pursued

that opportunity. Thus, as NES submits, the only question is whether NES could

have pursued that opportunity such that the benefit would have been yielded. The

answer to this question necessarily involves the court assessing the prospects of

success of that opportunity had it been pursued. Thus, in Sellars v Adelaide Petroleum

NL (“Sellars”), Mason CJ, Dawson, Toohey and Gaudron JJ said:794

[T]he general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It

791 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332. 792 [2007] VSCA 309, [26]. 793 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 362. 794 (1994) 179 CLR 332 at 355 (emphasis in original).


is no answer to that way of viewing an applicant’s case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.

263 Woolworths contends, on the other hand, that the opportunity NES claims to have

lost could not have been pursued and therefore has no value. Woolworths say that

had they acted reasonably and in good faith:

(a) agreement would not have been reached in relation to the calculation and

manner of payment of the Landlord’s Works Costs and Tenant’s contribution;

(b) NES would not have been able to obtain funding to purchase and develop the

Bendigo site;

(c) NES would not have obtained the necessary planning approval necessary to

develop the land (which included rezoning part of the land); and

(d) the development could not have been completed in accordance with

Woolworths’ plans and specifications as a result of flood inundation issues

associated with the land.

For the reasons which follow, each of these contentions should, in my view, be

rejected.

Would agreement have been reached in relation to the Landlord’s Works Costs?

264 Woolworths contend that a “further Sellars discount would need to be applied to

reflect the fact that it is highly unlikely that an agreement in relation to the

[Landlord’s Works Costs] would in any event have been reached.”795 Woolworths

say that there was no evidence to suggest that they would ever have “acceded to Mr

Blake’s insistent request that the payment be made up front.”796 The parties were

unlikely, it is said, to reach agreement in relation to this important matter. Indeed, it

is said that the evidence in the proceeding, even now, shows that the parties still

cannot agree on the amount of the tenant’s contribution towards the Landlord’s

795 Defendants’ Closing Submissions (3 September 2015) [430]. 796 Defendants’ Closing Submissions (3 September 2015) [430].


Works Costs. This contention is, however, in my view, one of over-simplification

and over-generalisation, to say the least. Rather, the evidence of Mr McDonald was

that Rider Hunt had worked with Vaughan Constructions in relation to each Masters

store Vaughan Constructions had built. With the exception of the Strathdale site,

Rider Hunt’s negotiations with Vaughan Constructions on behalf of Woolworths

had always been satisfactorily concluded.797 Moreover, Mr McDonald said that, in

his opinion Rider Hunt and Vaughan Constructions had a good working

relationship and that, based on their track record, he considered it was likely that

they would have been able to reach agreement.798 Thus, the only real question is

what Landlord’s Works Costs and contribution amount would have been agreed?

265 The documentary evidence does demonstrate that by the conclusion of the open

book review process—at least as far as that process involved a line by line

comparison of costs between a generic Bunnings and a generic Masters store—Rider

Hunt and Vaughan Constructions had estimated that Masters’ contribution would

be $3,247,195.799 A subsequent review by Rider Hunt of the Vaughan Constructions

estimate, between 12 April 2010 and 18 April 2010, resulted in Rider Hunt and

Vaughan Constructions arriving at a Landlord’s Works Cost estimate of

$11,516,809.800 This equated to a Masters contribution of $2,941,169,801 as set out in

the revised NES contribution notice. No discussions took place between Rider Hunt

and Vaughan Constructions after this time. NES contends that it may therefore be

inferred because agreement had been reached and Rider Hunt’s comments

incorporated into the revised contribution notice.802

266 NES submits that as both estimates arrived at by Rider Hunt and Vaughan

Constructions equalled or exceeded the revised contribution amount sought by NES

797 Transcript 1273. 798 Transcript 1287. 799 Court Book 3293. 800 Court Book 3367, 3393. 801 The amount would have been $2,783,739 had the Vaughan Constructions estimate of the cost to

construct a Bunnings store been applied. For the reasons set out below the Troons estimate should be preferred.

802 Mr McDonald’s oral evidence to the effect that Rider Hunt ceased working unless specifically asked to continue should be rejected. If there were matters to be agreed, such as the items in the Rider Hunt 22 April 2010 letter, these would have been put to Vaughan Constructions. They were not.


of $2,941,169,803 it is open for the Court to find, and the Court should find, that had

Woolworths not been working to an undisclosed budget, they would have agreed to

pay the revised contribution amount. In light of all these circumstances, matters

which have been discussed in the preceding reasons, I am of the opinion that the

parties would have agreed to pay the revised contribution amount. Moreover,

having regard to the terms of the Letter of Offer, particularly cl 13, and the

Agreement for Lease, it is, in my view, likely that in spite of disagreement between

the parties in this respect, the “contribution” would have been paid as a lump sum at

the completion of the Strathdale development. Had this not been the case, then NES

may have been required to borrow some or all of that amount to complete the

construction, in which case it would have incurred interest on these borrowings until

that contribution had been paid by Woolworths.

267 Finally, NES submits that if, contrary to its submissions, the Court finds that other

adjustments ought to have been agreed,804 Mr Blake’s evidence is that had he been

satisfied that the Landlord’s Works Costs was properly calculated, then NES would

have accepted the lesser contribution.805

Would Bendigo Bank have funded the development?

268 Obviously, without funding, the Strathdale development could not proceed and

however vehemently Mr Blake sought, through NES, to pursue the opportunity, it

would have been beyond reach and not a relevant consideration were the position to

be that the Bendigo Bank would not have funded the development.

269 The position of Woolworths in this respect is that as NES would have been funding

the development by loans from Bendigo Bank, the development would have been

unlikely to proceed because, it is said, it is evident that Bendigo Bank was extremely

keen for the Maxi Foods group to reduce its indebtedness and would have been

unlikely to consider new finance, especially where the relevant entity had little

803 Court Book 3345. 804 Such as the $123,497 for fit-out. 805 Outline of Brendan Edward Blake (6 March 2015) [232].


equity in the project.

270 In support of its submissions in this respect, Woolworths provides a summary of

contemporaneous documents which are said to be the best reflection of Bendigo

Bank’s position and speak to the serious risk that NES would not have obtained

funding for the development. The summary is as follows:806

Document Detail

Credit memorandum dated 13 January 2010807

This credit memorandum was made in respect of an application by the Blake … group for $450,000 of finance for the Kennington Village development (an unrelated development in Bendigo).

The financial figures set out in the memorandum indicate that the group was extremely highly leveraged and did not have the capacity to accommodate more debt. Examples of this include:

(a) the Group’s TAE/XTV ratio. This is the ratio of total asset exposure against the total extended value of security, which effectively measures the total value of the securities that the bank holds as against its debt exposure to the Group. The group’s TAE/XTV was 141.64 per cent. well outside of the bank's policy of 100 per cent;

(b) the Group’s sensitised debt cover in the previous three periods were 1.25x, 1.19x and 0.63x. Sensitised debt cover is the amount by which the income of the group exceeds the interest repayments required to be paid to the bank. Ordinarily it is expected that this figure is in excess of 2.0x.

Recommendation from Tony Bellizia, Senior Manager, Group Credit Bureau dated 5 February 2010808

In his recommendation to the Credit Committee for this application Mr Bellizia, who was Mr McGregor’s senior manager:

(a) imposed a series of stringent conditions on the approval by the bank of any additional finance to the group; and

(b) further downgraded the Blake Group’s credit rating, from EQ5 (as proposed by Mr Blake’s banking manager, Mr McGregor) to ES7, reflecting concern from the bank’s perspective.

806 Defendants’ Closing Submissions (3 September 2015) [379]. 807 Court Book 2590–606. 808 Court Book 2848.


Document Detail

Minutes of the Credit Committee809

The Credit Committee confirmed and further introduced stringent conditions on the provision of finance to the group in 2010 which were required to be satisfied before any additional finance would be granted:

Risk Grade to be amended to 7;

Blake Group to be placed on Watch status and Asset Management to [be] involved from a monitoring perspective;

Updated Valuations to be obtained within 60 days (noting condition precedent that written instructions for the bank to instruct a panel valuer to undertake revaluations);

Registered Mortgage Debenture and Interlocking Guarantee and Indemnity to be taken from Maxi Group Holdings Pty Ltd;

Investigation into ability of the ATO to set-off any tax liability against the GST refund;

2 year cashflow forecasts to be provided by the group within 60 days;

Direct charge to be taken over a liquor licence;

A negative pledge/written confirmation that the directors will not raise any further liabilities, excluding the $6.4m Woolworths debt, against Kennington Village Pty Ltd;

Provision of an unconditional contract of sale over Maxi Food Redan supermarket by no later than 31 March 2010; and

Provision of ATO integrated Client Statements on a quarterly basis in line with quarterly management accounts.

Placing the group on Watch status and involving Asset Management is generally reserved only for high risk clients.810

809 Court Book 5477–8. 810 See, eg, Transcript 350.


Document Detail

Email chain from Graham Hackett to Andrew McGregor811

Graham Hackett states that “David & I have discussed this and neither of us believe you will get the Credit Committee support for this transaction on a standalone basis. The issue is that Blake has little equity in this transaction and believe that the other items should be corrected before we advance any further debt to this group.”

MCC/BCC – Submission Fate issued by Neil Brunner812

A submission was approved but noted that “An appropriately worded Formal letter is to be issued to the customer highlighting the banks continuing concerns over his group financial position and our requirement that an additional significant asset sale program needs to be agreed to (in addition to the expected reduction to come from the Horsham, Mansfield & Kennington securities/property sales) before the bank will agree to further facility extensions at our next review in February 2012.” It went on to note that if those conditions weren’t complied with, the bank would put either Bunnings Ballarat or Mr Blake’s family home in Toorak on the market immediately.

Credit reporting memo dated 12 December 2011813

“While the closure of Horsham and sale of the Kennington Village property has resulted in a significant improvement in the cash flow of the group, as was noted by ECC, there remains [an] unhealthy reliance on the trading performance of the Castlemaine supermarket and the group still has too many non income producing assets.”

271 The Minutes of the Woolworths Property Committee and the contemporaneous

notes of Mr Champion do reflect a belief—a mistaken belief contends NES—on the

part of Woolworths that NES had funding issues and would be unable to secure

funding for the development.814 As discussed previously, it seems likely that this

mistaken belief came about as a result of Mr Macmillan having been told that there

had been issues in relation to the Kennington Village development.815 As submitted

by NES, Mr Macmillan’s evidence to the effect that Mr Blake told him that NES had

811 Court Book 3861–3. 812 Court Book 3879. 813 Court Book 3881–2. 814 Court Book 3143. 815 Transcript 1173, 1177.


funding issues is not reflected in any contemporaneous documents passing between

Woolworths and NES.816 Moreover, Mr Blake’s evidence is that he had never said

NES had funding issues and that it would have been premature for NES to have

sought funding prior to planning approval having been obtained for the Strathdale

development.817 Having regard to the lack of contemporaneous documentary

evidence and Mr Blake’s evidence, I am of the view that the Court should find that

Mr Blake did not say that NES had funding issues.

272 Woolworths’ contentions in relation to its claim that NES had funding issues are on

the basis of a breach of covenant and various other Bendigo Bank documents that the

Bank had imposed strict conditions upon Mr Blake’s Maxi Foods Group which

would have prevented NES from obtaining funding from the Bank.818 Nevertheless,

the evidence of an employee and former employee of the Bank, Mr McGregor and

Mr Stockwell respectively, would indicate that this is not a correct understanding of

the Bank’s position with respect to Mr Blake and the Maxi Foods Group.

273 The evidence of Mr Stockwell was that an application by NES for funding from the

Bank would have fallen within the Bank’s lending parameters819 and would have

been regarded positively,820 particularly given the presence of a blue chip, long term

tenant such as Masters, a Woolworths company,821 and the Blake Group’s positive

record in relation to developments of this kind, including the development of a

Bunnings store in Ballarat.822 The evidence of Mr Stockwell is that the one breach of

a covenant by the Maxi Foods Group and the decision to walk away from the

Kennington Village development would have had no material impact upon the

ability of the Group or Mr Blake to borrow further funds.823 Despite an email

exchange expressing concern over the Kennington Village development,

816 Transcript 1176, 1177. 817 Transcript 207. 818 See Transcript 207. See also the documents to which Woolworths refers, as set out above at [270]. 819 Transcript 435. 820 Outline of Evidence of Andrew McGregor (5 March 2015) [17]. 821 Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [18]; Outline of Evidence of Andrew McGregor

(5 March 2015) [22]–[23]. 822 Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [17]. 823 Transcript 433; Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [23]–[25]; Outline of

Evidence of Andrew McGregor (5 March 2015) [26], [37], [61].


Mr Stockwell gave evidence that the Bank would still strongly consider advancing

funding to Mr Blake.824 At no time was the Group considered to be “a client that

was in distress or unable to qualify for credit from the Bank.”825 In fact, to the

contrary, Mr Stockwell considered that the Group had a good credit performance, a

good credit history and a stable credit rating.826

274 Woolworths, in its submissions, describes the evidence of both the Bank witnesses,

Mr McGregor and Mr Stockwell, as quite unsatisfactory.

275 In relation to Mr McGregor, Woolworths says that he was an advocate for his

customer; adding that to an extent, there is no criticism in this as his job was to

advocate for his client to obtain new credit. It is said that Mr McGregor did not seem

to be able to distance himself from this role in giving evidence and that this was

apparent generally from the prolix and argumentative answers given to simple

questions. An example given in support of this contention is the question asked of

Mr McGregor, namely whether, in considering new finance, for the Maxi Foods

Group, the Bank would consider the overall indebtedness of the Group. It is said by

Woolworths that Mr McGregor, having previously accepted the simple proposition

that in assessing the applicable risk grade for a customer, the Bank would consider

the overall indebtedness of the customer to the Bank and that, when asked if the

Bank would consider the overall indebtedness of the Group in considering new

finance, his answer was, as he said, more like a response to a “job interview”.827 In

my view, however, such a characterisation of Mr McGregor’s evidence and the

manner and nature of his responses as applied by Woolworths is disingenuous and

not supportable both in terms of the transcribed text of his evidence and having

heard the witness and observed his demeanour. It is true that some of his answers

were lengthy and it is fair to say that he appeared to have a high regard for Mr Blake

and his Maxi Foods Group businesses, but, otherwise, Mr McGregor did, in my

view, seek to present a fair view of the Bank’s assessment of the Group and the

824 Transcript 437–8; Court Book 3861–3. 825 Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [11]. 826 Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [13]–[14]. 827 Transcript 361–4. See also Defendants’ Closing Submissions (3 September 2015) [381].


likelihood of its financing the Strathdale development.

276 Woolworths also contends that Mr McGregor was at pains to get across that, in his

view, if the transaction made sense on a standard loan basis and would improve the

overall position of the client, then the new finance ought to be approved.828

Moreover, it is said that Mr McGregor was reluctant to accept that the Bank’s Credit

Committee might take a different view.829 The basis for this submission is a question

and answer, as follows:830

The Credit Committee may take a different view, mightn’t they, Mr McGregor?---No, I – not in my experience, no. I think Bendigo Bank - - -.

It was then put to Mr McGregor that the Bank was concerned about the overall

indebtedness of the Group, wanting the Group to reduce its debt and would be

unlikely to consider new finance until it did so, especially where the relevant entity

had little equity in the project. In any event, Mr McGregor maintained his position

and as an experienced and longstanding employee of the Bank, I am of the view that

his evidence should be accepted in spite of the view underlying the Woolworths

submissions that the Bank was unlikely to finance the project because of the level of

indebtedness of the Group. Woolworths’ position in this respect is, however, a

matter of inference and supposition which is not unequivocally established by the

documents to which Woolworths refers in its submissions and stands in the face of

evidence to the contrary by Mr McGregor and Mr Stockwell; witnesses who are

independent of NES though, of course, they had known and dealt with Mr Blake and

the Group over many years.

277 Woolworths then turns in its submissions to the detail of the Kennington Village

transaction:831

383. In discussing the particulars of the Kennington Village transaction, Mr McGregor:

(a) volunteered, at length, his own summary of why he believed

828 Transcript 364. 829 Transcript 364. 830 Transcript 364. 831 Defendants’ Closing Submissions (3 September 2015) [383]–[384].


the transaction would have been approved;832

(b) expressed his “very keen” desire for the Court to understand why he recommended the loans;833 and

(c) endeavoured to explain away why the bank had downgraded [the] group's security position from D to E, on the basis that it was just a change in interpretation in a policy, before accepting that it was a change in the policy.834

384. However, Mr McGregor’s advocacy was perhaps most clearly demonstrated in his approval of the outline of evidence filed on his behalf. That is:

(a) Mr McGregor was taken to the memorandum prepared by Tony Bellizia, Senior Manager Group Credit Bureau, which was attached to an email to Mr McGregor dated 5 February 2010.835 This memorandum was Mr Bellizia's comments on the Credit Memorandum that was to be submitted to the Credit Committee in respect of the Kennington Village loans;836

(b) despite initially saying that he had not seen Mr Bellizia’s memorandum before preparing his outline of evidence,837 Mr McGregor also said that he had sent all of the bank documents to NES’s solicitors with “specific instructions to make sure that the documents I provided coincided with what was required … so I had to go through document by document”;838

(c) in his outline839 Mr McGregor actually quoted840 Mr Bellizia’s summary conclusion that: “despite some negative aspects, the writer believes that the group are well placed to turning things around in the short term. We have supported the group to date … and the group is worthy of our ongoing support”; 841

(d) however, while being apparently happy to quote the favourable summary referred to above, Mr McGregor did not attach a copy of this memorandum to his outline and did not refer to the much less favourable comments that Mr Bellizia had added in bold at the end of the memorandum,842 which had been added after Mr Bellizia had become aware of a tax arrangement that the group had entered into. These comments recommended a further downgrade of the security rating for the group and the imposition of stringent conditions

832 Transcript 366–8. 833 Transcript 368. 834 Transcript 370–1. 835 Court Book 2848, 4803. 836 Dated 13 January 2010. See Outline of Evidence of Andrew McGregor (5 March 2015) [41], [58], which

refers to the Credit Memorandum as “BEN.2”: Court Book 2590–606. 837 Transcript 377. 838 Transcript 376. 839 Outline of Evidence of Andrew McGregor (5 March 2015) [41]. 840 Albeit slightly inaccurately. See below [281]. 841 Court Book 4806. 842 Court Book 4807.


subsequent to the loan approval, aimed at reducing the group’s debt; and

(e) Mr McGregor said he didn’t include a reference to the “bold” comments as the outline was his “witness statement in terms of how I view the situation”843 and that he “didn’t think it was necessary.”844

The reference in the submissions to the “bold” comments of Mr Bellizia are to

comments as follows:845

I have also provided the committee with a project security/servicing position should we be asked to refinance the Woolworth debt in 6 months:

*PROPOSED **SALE OF REDAN GOODWILL

***REFINANCE WOOLWORTHS

DEBT

TAE: $36,686 $30,846 $37296

XTV: $25,616 $31,811 $36,946

Market Value

$51,755 $51,755 $59,655

TAE/XTV Ratio:

141.2% 95.5% 97.5%

LVR: 91.5% 58.6% 61.6%

Project DSC 1.10x 1.31x 1.15x

- * Projected DSC includes the proposed Woolworths exposure of $6.4mil @ 9 per cent

- ** Assumes Mortgage of Lease is in place prior to or around the same time Maxi Foods Redan sale settlement occurs, we only receive $5mil from the sale proceeds and the GST loan of $790k will have been cleared

- ***Refinance Woolworths debt ($6.4mil) with the bank to take a first mortgage over the property with the purchase price of $7.9mil utilized within the above figures, albeit property will be revalued at the time

- Projected serviceability remains tight therefore it is imperative the closure of Horsham and sale of non income producing assets also be considered by the group.

TONY BELLIZIA SENIOR MANAGER, GROUP CREDIT BUREAU

DISCLOSURE BY THE BBM AFTER MY RECOMMENDATION HAD BEEN LODGED OF A TAX ARRANGEMENT OF $400K ($25K PER MONTH UNTIL 2011) THE FOLLOWING CHANGES WILL NOW BE RECOMMENDED:

843 Transcript 387. 844 Transcript 388. 845 Court Book 4807 (emphasis in original).


- RISK GRADE ES7 TO NOW APPLY

CONDITIONS SUBSEQUENT TO NOW INCLUDE: - PROVISION OF AN UNCONDITIONAL CONTRACT OF SALE

FOR MAXI FOOD REDAN BY NO LATER THAN 31 MARCH 2010 WITH FULL SALE PROCEEDS TO BE PLACED TOWARDS PERMANENT DEBT REDUCTION OF THE BANKS FACILITY

- PROVISION OF AN EXECUTED MORTGAGE OF LEASE OVER IGA CASTLEMAINE BU NO LATER THAN 30 APRIL 2010

- PROVISION OF ATO INTEGRATED CLIENT STATEMENTS ON A QUARTERLY BASIS

Nevertheless, there is no evidence that the Bank took any particular action with

respect to these “bold” comments or that Mr McGregor was incorrect in his

assessment that the Maxi Foods Group and Mr Blake would be supported by the

Bank in the future.

278 Woolworths observe in their submissions that Mr Stockwell is no longer employed

by the Bank and adds that it might be suggested that he had no reason to advocate in

favour of Mr Blake. However, it is submitted that, apart from any sense of lingering

loyalty that Mr Stockwell might feel towards Mr Blake, it was apparent that

Mr Stockwell had “painted himself into a corner with the opinions he had expressed

in his outline of evidence, which had been prepared based solely upon his memory

and impressions of the group over a large number of years and without the benefit

of reviewing any of the contemporaneous documents” to which Woolworths

refers.846 Moreover, Woolworths submit that Mr Stockwell was unwilling to

consider the significance of these contemporaneous documents with an open mind

and moved beyond the generally favourable recollections he had of dealings with

the Group. It is said that “[h]is evidence was, in effect, a reflection of the

unsatisfactory way his outline had been prepared.”847 The point is emphasised by

submissions that Mr Stockwell’s evidence was starkly at odds with the

contemporaneous documents.848 Moreover, it is submitted that Mr Stockwell’s view

that the Bank’s sense of loyalty to its client would ultimately override the numerous

concerns expressed in the documents849 is, it is said, simply not consistent with

846 Defendants’ Closing Submissions (3 September 2015) [389]. See Transcript 430–2. 847 Defendants’ Closing Submissions (3 September 2015) [389]. 848 Transcript 426–8, 433. 849 Transcript 434–5, 443.


contemporaneous internal communications. In relation to the latter, particular

reference is made to the email exchange between Mr McGregor and Mr Hackett850

which, Woolworths contends, represented the position of the Bank at that time (in

September 2010) as well as in February 2010,851 and that the principal focus of the

Bank throughout the relevant period was in seeking debt reduction.852

279 Again, in my view, these submissions merit the same response to the similar

submissions made with respect to the evidence of Mr McGregor. The submissions

by Woolworths are based upon its inferences and assertions on the basis of various

bank documents, but they are inferences and assertions which fly in the face of the

evidence of long-term and experienced employees of the Bank. Moreover, these

witnesses are independent of Mr Blake and the Maxi Foods Group, and to say that

their evidence should be, in effect, disregarded on the basis that their dealings with

Mr Blake and the Group would have produced some overriding loyalty which

would have tainted their evidence and objectivity is disingenuous and, in my view,

must be rejected.

280 Nevertheless, as Woolworths contend, the Bank was concerned to reduce the

indebtedness of Mr Blake and the Group, as is clear from the documents to which

reference is made and the evidence that at one stage the Bank had considered

requiring Mr Blake to sell his private home in Toorak to reduce debt.853

281 In spite of the submissions by Woolworths with respect to the Bank’s desire for debt

reduction and problems that occurred with respect to the Kennington Village

Development,854 the position remains that in spite of the “bold” comments in

Mr Bellizia’s memorandum, the conclusion in the 13 January 2010 credit

memorandum as per the responses dated 5 February 2010 was, as set out above with

850 Court Book 3861–3. 851 Transcript 439–41. 852 Transcript 444. 853 Court Book 3879. See Transcript 446–7. See also Defendants’ Closing Submissions (3 September 2015)

[390]–[392]. 854 See especially Defendants’ Closing Submissions (3 September 2015) [386]–[388].


reference to Mr McGregor’s outline:855

Despite some negative aspects the writer believes that the Group are well positioned to turning things around in the short to medium term. We have supported the group to date and in the overall scheme the request represents a permanent increase of 1.3 per cent to the current exposure and is worthy of our ongoing support.

282 By early 2010, the Maxi Foods Group had taken tangible steps to improve its

financial position856 and, rather than being concerned about the increase in debt, an

application for funding for the Strathdale development would have been supported

by the Bank as part of a long-term strategy of diversification into long-term

investments.857 Mr Stockwell gave evidence that in relation to a client such as

Mr Blake, who had strong assets and a strong business, involvement in a

diversification project would have been in line with what the Bank wanted and

would in fact have helped the Bank feel more comfortable in advancing further

money to the Maxi Foods Group.858 Mr Stockwell’s evidence was that any

application by NES would have progressed to the Credit Committee, with negligible

chance that it would have been dismissed before that stage.859 Moreover, it was the

evidence of Mr Stockwell that the Credit Committee would have supported the

Strathdale development.860 Mr Blake was, Mr Stockwell said, regarded as one of the

most valued customers in the Bank’s head office business centre, and a customer

whom the Credit Committee wished to keep supporting.861 As such, Mr Stockwell

said it would have taken something “quite extraordinary” for the Bank to have

refused to finance the proposed development.862 More specifically, Mr Stockwell

gave evidence that if he had been presented with an application by NES for a loan of

approximately $17 million to fund the purchase of the Strathdale site land and

construct the proposed development, he would have supported the application and

recommended that the loan be approved, as would, he believed, the Credit

855 Court Book 4806. See above [277]. 856 Outline of Evidence of Andrew McGregor (5 March 2015) [39]–[40]. 857 Transcript 426. 858 Transcript 443. 859 Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [21]. 860 Transcript 443. 861 Transcript 443–4. 862 Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [31].


Committee863 and other banking institutions including Bank West.864

283 For the preceding reasons, as submitted by NES, it is open to the Court to find, and

the Court should find, on the basis of the evidence of Mr Stockwell and

Mr McGregor, that an application for funding to the Bendigo Bank was highly likely

to have been granted and that funding of the Strathdale development would not

have prevented the development of the Strathdale site by NES or have precluded

NES from leasing that site to Masters.

Would flood inundation issues have prevented the development?

284 It is common ground that the Strathdale site was subject to two environmental

overlays. The first was an Environmental Significance Overlay—Schedule 1

(Watercourse Protection) (“the Environmental Significance Overlay”), and the

second, a Land Subject to Inundation Overlay (“the Inundation Overlay”). These

overlays required that any development on the Strathdale site must have regard to

the sensitivities of the adjoining watercourse, minimise flood damage and allow for

the free passage and temporary storage of flood waters.865 The inclusion of the

Strathdale site within a land subject to inundation overlay required that any

application for development be referred to the relevant flood plain management

authority pursuant to cll 44.04–5 and 66 of the City of Greater Bendigo Planning

Scheme. The relevant flood plain management authority is the North Central

Catchment Management Authority (“NCCMA”).866 The question is, therefore,

whether the requirements of these overlays could be met in such a way as to allow

the Strathdale development to proceed.

285 NES was aware of the Inundation Overlay from at least 12 June 2008.867 Further

information from the NCCMA in relation to flood impacts on the Strathdale site was

sought by NES on 25 February 2009. On 27 February 2009, the NCCMA advised

863 Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [21]; Transcript 434–6. 864 Outline of Evidence of Trevor Ernest Stockwell (5 March 2015) [36]. 865 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [40]. 866 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [95]. 867 Court Book 781.


that—868

in the event of a 100 year ARI flood it is unlikely that the existing dwelling would be affected by flooding. It is possible though that a significant portion in the north-east of the property adjacent to the Racecourse Creek may be subject to inundation …

The NCCMA recommended that a licensed surveyor be engaged to determine the

exact effect of the applicable flood level on the property.

286 On 18 May 2012, the NCCMA responded that before it could give formal consent to

the development on the site, plans outlining how the following minimum conditions

would be achieved would be required to be submitted for approval:869

1. Any new development must be set back a minimum of 30 metres from Racecourse Creek, in accordance with Clause 14.02–1 of the State Planning Policy Framework of the Greater Bendigo Planning Scheme.

2. New development adjacent to the waterway must exhibit an appropriate waterway interface i.e. new lots should not have rear boundaries adjacent to the waterway reserve.

3. All new allotments must be filled to at least the declared 1 per cent AEP flood level(s).

4. The finished floor level of any future dwellings must be constructed a minimum of 300mm above the declared flood level.

287 The evidence is that Woolworths’ Site Selection Criteria required that the site not be

prone to flooding.870 Woolworths did, nevertheless, approve the development of the

Strathdale Site in spite of the apparent flood risk.871 NES submits that the Court

should infer that Woolworths believed that any inundation issues that affected the

site could be managed. For the reasons which follow, I am of the view that this is a

reasonable inference and one to which reference should be made and, particularly,

as the evidence does, in my view, establish that any inundation issues that affected

the site could in fact be managed satisfactorily.

288 Despite having approved the site and despite not having raised any concerns with

868 Court Book 945–6. 869 Court Book 3887. 870 Court Book 4562. 871 Court Book 1231.


NES with respect to flooding or inundation issues while the Agreement for Lease

was on foot, Woolworths did, in May 2012, seek to obtain further advice from the

NCCMA in relation to whether flood inundation issues would preclude the

development. The advice was sought by Mr Milinkovic of Urban Design &

Management, and was provided by the NCCMA on 18 May 2012. This advice was,

of course, provided well after the Agreement for Lease had been terminated by

Woolworths and at the time when the present dispute was, NES contends, within

the contemplation of Woolworths. NES also observes that no person from Urban

Design & Management or the NCCMA was called by Woolworths to give evidence

in the proceeding. More particularly, NES objects to Woolworths relying on the

letter of 18 May 2012 from the NCCMA as evidence of its contents or as proof of the

position that the NCCMA may have taken to any application by NES for planning

approval. Woolworths has chosen not to put into evidence the letter and proposal to

which the 18 May 2012 letter from the NCCMA responded or to call either the

NCCMA or the author of the proposal to which the letter responded. In any event,

the letter, on its face, appears to relate to a proposed multi lot residential subdivision

and not a large box home improvement centre with a large car-park area.

289 Having regard to the matters raised by NES in support of its objection to the receipt

of the 18 May 2012 NCCMA letter into evidence as evidence of its contents or as

proof of the position that the NCCMA may have taken to any application by NES for

planning approval, its apparent reference to a multi lot residential subdivision and

the lack of critically important contextual evidence, namely, the letter from

Woolworths requesting this advice, I am of the view that the objection is made out.

Consequently, the evidentiary value of the 18 May 2012 letter from the NCCMA is

no more than that appropriate flood mitigation measures would be required,

depending upon the nature of the development contemplated on the Strathdale site

and in conformity with the State Planning Policy Framework of the Greater Bendigo

Planning Scheme (“the State Planning Objectives”). Importantly, in the present

circumstances, the letter is not, in my view, evidence of any issue with respect to

flooding which was seen as imposing an obstacle to the proposed Strathdale site


development. This position is reinforced by other evidence and matters to which I

now turn.

290 Woolworths contend that the condition that any development must be set back a

minimum of 30 metres from the nearby watercourse, Racecourse Creek, in

accordance with cl 14.02–1 of the State Planning Objectives would have precluded

NES from constructing the store on the Strathdale site without changes to the design

of the store, which changes Woolworths said would not have been approved. In any

event, Mr Macmillan admitted in cross-examination that planning and flooding

issues were characteristic of a number of sites Woolworths was involved in and that

these were simply issues to be worked through by the landlord.872 In any event, in

my view, it is not necessary to decide this issue as, for the reasons which follow, the

evidence supports a finding that the store could have been constructed on the

Strathdale site without the need for any such modification. In any event, I accept

that even if this were not the case, it is, as NES submits, open to the Court to infer,

and that the Court should infer, that had Woolworths acted reasonably and in good

faith and with the contractual object of progressing the development in mind, they

would have agreed to any changes to the design that were reasonably necessary to

mitigate the flood inundation issues.

291 The only expert called by the parties to address the question of whether the

Strathdale development could be constructed in a way that would mitigate any

impact on the adjoining watercourse, minimise flood damage and allow for the free

passage and temporary storage of flood waters was Mr Chris Thomas of

WorleyParsons. Mr Thomas’ evidence was that proximity to a watercourse does not

usually preclude developments of this kind.873 In his second expert report,

Mr Thomas provided examples of a number of big box hardware stores and

warehouse distribution centres that had been constructed in locations near

watercourses or in areas prone to inundation or flooding.874

872 Transcript 646. 873 Expert Report of Chris Thomas (8 May 2015) 12. 874 Expert Report of Chris Thomas (8 May 2015). See also Transcript 522–3.


292 Although Mr Thomas’ evidence was that the proposed development could not be

constructed in accordance with the Catchment Planning and Management objectives

set out in the State Planning Objectives,875 his evidence is that a setback of 30 metres

was “excessive” and that a lesser setback could have been negotiated.876

Mr Thomas’ evidence was that the costs of implementing a solution that would meet

the requirements of the planning scheme would not have been prohibitive to the

development of the site.877 Mr Thomas’ evidence was also that setbacks are not

imposed solely having regard to hydrological considerations.878 In this respect,

Mr Thomas noted that: “In my opinion, the imposition of a strict 30 metre setback

from Racecourse Creek is not relevant to potential flooding issues arising from the

proposed development.”879 Setback requirements, he said, also offer benefits in

relation to inundation risks and water quality by filtering sediment and pollution

from the runoff from developed areas before it enters a natural creek.880 Again, this

evidence is, in my view, supportive of the position that meeting the requirements of

the planning scheme with respect to flood inundation issues would not have been

prohibitive to the development of the site. For these and the reasons which follow,

the submissions by Woolworths that the store could not, relevantly, have been built

as designed must be rejected.881

293 The evidence of Mr Biacsi, the planning expert called by NES, was that the 30 metre

setback referred to in the NCCMA letter was not a requirement that must be met in

order for the site to be developed. It was Mr Biacsi’s opinion that cl 14.02–1 of the

State Planning Objectives applied as a guideline and not as a statutory requirement

mandating strict or absolute compliance.882 It is, as Woolworths submit, “quite

apparent” to Mr Biacsi that flooding would have been an issue of concern to the

advisory committee in assessing any planning application in respect of the

875 Expert Report of Chris Thomas (8 May 2015) 9. 876 Expert Report of Chris Thomas (8 May 2015) 7. 877 Expert Report of Chris Thomas (8 May 2015) 7. 878 Expert Report of Chris Thomas (8 May 2015) 7. 879 Expert Report of Chris Thomas (8 May 2015) 13. 880 Expert Report of Chris Thomas (8 May 2015) 7. 881 Cf Defendants’ Closing Submissions (3 September 2015) [418]–[420]. 882 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [74].


Strathdale site.883 In this respect Mr Biacsi noted:884

The suitability of the site and potential flooding and water quality impacts are matters about which the Advisory Committee would have been keenly interested and needed to be convinced.

294 Mr Biacsi noted that, in his experience, inundation risks can raise a number of other

considerations of relevance to the planning process, including maintaining stream

habitats, large trees, native grass and wildlife corridors, and preventing the erosion

of stream banks.885 Additionally, Woolworths submit that it is important to note that

the proposed development was inconsistent with the condition of the State Planning

Objectives requiring that any development be set back 30 metres from Racecourse

Creek,886 which provides:887

Retain natural drainage corridors with vegetated buffer zones at least 30m wide along each side of a natural waterway to maintain the natural drainage function, stream habitat and wildlife corridors and landscape values, to minimise erosion of stream banks and verges and to reduce polluted surface runoff from adjacent land uses.

Nevertheless, as both Mr Biacsi and Mr Thomas said in their evidence, development

within 30 metres of the waterway may be permitted on a case-by-case basis, said

Mr Biacsi,888 and that a lesser setback could have been negotiated, said

Mr Thomas.889 Again, this is consistent with the evidence of Mr McGurn, the

Woolworths planning expert, who acknowledged that while the Inundation Overlay

posed challenges to the development of the site “these physical constraints could

potentially be overcome”.890 Mr McGurn’s evidence was to the effect that he could

not say “with any certainty” whether an acceptable layout could be achieved, given

the lack of resolved plans.891 It is contended by Woolworths that this should lead to

883 Transcript 560. See also Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015)

[56]. 884 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [72]. 885 Transcript 560–1. See also Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April

2015) [56]. 886 Expert Report of Chris Thomas (8 May 2015) 7, 9. 887 Expert Report of Chris Thomas (8 May 2015) 7. 888 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [75]. 889 Expert Report of Chris Thomas (8 May 2015) 7. 890 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [103]. 891 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [103].


the view that the proposition that physical constraints could potentially be overcome

is of little assistance to the Court. In my view, the position is quite the contrary. The

lack of resolved plans, together with the evidence from the various experts whose

evidence has been referred to in the preceding reasons that flood inundation issues

are most likely able to be overcome, and the “fluid”—no pun intended—nature of

the development negotiation and planning process at this time would tend to

suggest even greater potential for overcoming flood inundation problems,

particularly where all parties concerned act reasonably and in good faith and with

the contractual object of progressing the development in mind.

295 Woolworths, in their submissions, also raise a number of other issues said to be

relevant to the assessment of the alleged loss of NES on the basis of the evidence of

these experts:892

412. This raises several questions that are relevant to the assessment of NES’ alleged loss:

(a) would a permit have issued which permitted the store to be constructed within the 30m setback? (If not, the development could not have proceeded);

(b) if development within the 30m setback was permitted, what measures would need to be taken to:

(i) address the risk of the store (and carparks) being inundated during flood events;

(ii) to implement any mitigation strategies required to address potential impacts downstream or to adjacent properties; and

(c) what would the costs of such measures be? (noting that associated costs would be outside the scope of the [Landlord’s Work’s Costs], and therefore fall entirely on NES).

413. As to the first question, Mr Biacsi was unable to offer an opinion on what, if any, conditions would have been imposed on the development as a result of the proximity to Racecourse Creek to the site.893 In Mr McGurn's opinion, it is likely that the conditions set out in the NCCMA's letter … including the 30m set back requirement, would form part of any planning permit that may have been issued

892 Defendants’ Closing Submissions (3 September 2015) [412]–[417]. 893 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [78].


for the site.894 This opinion was not challenged in cross-examination.

414. In relation to the risk of inundation, NES’s inundation expert, Mr Thomas, gave evidence that the development would encroach on the 1 in 100 year ARI flood level, rendering it likely that part of the development footprint would be inundated during a 100 year ARI flood if constructed at current elevations.895

415. Mr Thomas warned that this may result in damage to the structure and contents of the building.896 He also gave evidence of the dangers that a 100 year flood event could pose if persons entered flood waters on the site,897 and the risk that vehicles parked on the northern boundary of the site may float during flooding events (of depths at or greater than 30cm), causing damages to structure, blocking flow paths and heightening the risk of injury to persons.898

416. Mr Thomas was unable to offer an opinion on the relevance of ecological considerations to the Strathdale site.899 He also did not inspect the site, instead relying on photos and Google street view imagery.900 (It is not clear whether the images he has relied on were taken during dry or non-dry periods.) Despite this, Mr Thomas was able to form the opinion that some form of setback would be necessary to meet the State Planning Objectives.901

417. These matters demonstrate that the risks arising from the flood zone and set back would have been of considerable concern to the Council and, if addressed in a planning approval, would have been addressed subject to conditions.

In my view, these matters do not take this particular aspect of the matter any further

and, moreover, do not provide evidence upon which it ought properly be concluded

that it was not more likely than not that the proposed Strathdale development would

proceed in spite of the inundation issues which have been discussed.

296 Finally, there is the evidence of Mr Troon, from Troons, which has constructed more

than 40 big box hardware stores for Bunnings, in relation to the NCCMA conditions.

Mr Troon’s evidence is that:902

The conditions in the development approval for the Masters store are conditions quite often applied to developments such as this.

894 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [105]. 895 Expert Report of Chris Thomas (8 May 2015) 3. 896 Expert Report of Chris Thomas (8 May 2015) 3. 897 Expert Report of Chris Thomas (8 May 2015) 3. 898 Expert Report of Chris Thomas (8 May 2015) 3. 899 Transcript 533. 900 Expert Report of Chris Thomas (8 May 2015) 2. 901 Expert Report of Chris Thomas (8 May 2015) 7. 902 Transcript 504; Expert Report of Steven Craig Troon (14 April 2015) [4.11].


We regularly engineer situations to comply with these conditions.

The application of these conditions has never resulted in our projects becoming unviable.

Catering for 100 [year] rain events is a common condition for a [development approval].

297 Mr Troon also gave evidence as to how these conditions could be accommodated

and estimated that the cost to comply with the conditions would be around

$350,000.903 No builder or engineer was called by Woolworths to give evidence that

the store could not have been developed as a result of the Inundation Overlay.

Indeed, such evidence would have directly contradicted Woolworths’

representations to the State Government that the site was “shovel ready” subject

only to planning approval.904

298 Having regard to the preceding reasons and the evidence to which reference has

been made, it is, in my view, as NES submits, open to the Court to find, and the

Court should find, that, just as proximity to flood prone areas had not precluded the

development of other big box hardware stores,905 the proximity of the Strathdale site

to Racecourse Creek would not have precluded the site from being developed in

accordance with the Plans and Specifications. Moreover, to the extent that

engineering solutions were required to mitigate any flood-related issues, these

solutions could have been incorporated into the construction at a total cost of less

than $350,000.906

Would the requisite planning approvals have been obtained?

299 The development of the Strathdale site could not proceed unless it was rezoned

under the Greater Bendigo Planning Scheme (“the Planning Scheme”), as part of the

site was zoned residential. An application was made seeking to have the entire

Strathdale site rezoned as Business 1 to enable the development to occur. That

application was subsequently withdrawn after the Agreement for Lease was

903 Expert Report of Steven Craig Troon (14 April 2015) [4.11]. 904 Court Book 2110. 905 Transcript 525. 906 Expert Report of Steven Craig Troon (14 April 2015) [4.11].


terminated. If the application had not been withdrawn, it would have been

considered by an advisory committee which had been appointed by the Minister

under s 151 of the Planning and Environment Act 1987 for the purpose of considering

a number of proposed Masters stores across Victoria.

300 Woolworths sought, in its submissions, to rely particularly on the evidence of the

NES planning expert, Mr Andrew Biacsi, in support of the position that obtaining

the necessary planning permission for the Strathdale site development would have

been doubtful to say the least:907

397. NES’s planning expert, Mr Andrew Biacsi and the Defendants’ planning expert, Mr Stuart McGurn, agreed that it is not possible, on the basis of information currently available, to predict with certainty how the advisory committee may have regarded any applications lodged in relation to the Strathdale site. Mr Biacsi, for example, indicated that he could not form a concluded view on this issue without having regard to a range of expert reports (including economic analysis, traffic and access reports, urban design reports, environmental impact reports, flooding and water management reports), which were never prepared for the Strathdale site.

398. It was apparent from the evidence given by the experts (for both parties) that there was a real risk the advisory committee would not have recommend granting the rezoning and planning approvals necessary to undertake the development.

399. The fact that the development did not have the support of the … Council would have weighed against the rezoning application. The advisory committee’s determination in relation to the proposed North Geelong Masters store (in relation to which Mr Biacsi had acted for the Defendants in respect of the rezoning application) is instructive in this regard. The proposed North Geelong store was the only proposed Masters site that was put to the advisory committee that was not approved. It was also the only proposed site that did not have council support.

400. Mr Biacsi suggested in his report that there might have been economic arguments in favour of the Strathdale development which could have counterbalanced or outweighed the opposition by the City of Greater Bendigo in the mind of the advisory committee. However, during cross examination he accepted that the committee did not recommend granting the rezoning sought for the North Geelong site, despite recognising the North Geelong proposal offered real economic benefits.

401. Another factor that would have weighed against the required

907 Defendants’ Closing Submissions (3 September 2015) [397]–[402] (citations omitted).


approvals being granted is the fact that of the rezoning application was outside the scheme framework. Mr Biacsi noted that this added an element of uncertainty. According to Mr Biacsi, the fact that the scheme discouraged allowing single use facilities to be located outside of activity centres would have weighed against the likelihood of the advisory committee recommending the application.

402. Ten of the eleven proposed Masters sites that were put to the Advisory Committee received approval. Of those 10, a majority were in or at the edge of recognised activity centres, and the balance had local council support. These are all, on this basis, distinguishable from the Strathdale site, which did not satisfy either of those criteria.

While there must always be some risk associated with seeking permissions or

permits with respect to planning matters, the “doubtful prospects” picture as sought

to be painted by Woolworths is, in my view, far too bleak and, for the reasons which

follow, I am of the view that it was more likely than not that planning permission

would have been granted to allow the Strathdale development to proceed as

planned—or relevantly substantially as planned.

301 Woolworths Site Selection and Negotiation Criteria stated that sites would only be

selected if they were appropriately zoned or had “good prospects of rezoning”.908

That the Strathdale site was selected and approved does evidence that Woolworths

believed that the site had a good prospect of rezoning. Moreover, for the reasons

which follow, this appears to be a reasonable assessment on the part of Woolworths.

302 On 24 November 2009, the Council informed Woolworths and representatives of the

Department of Innovation, Industry and Regional Development (“DIIRD”), who

were assisting Woolworths with the Oxygen rollout, that, while the Council was

very supportive of having a Masters store in Bendigo, it had a number of concerns

with the store being located at the Strathdale site.909 Woolworths contends that the

position taken by the Council would have precluded NES from obtaining the

planning approvals necessary to develop the Strathdale site. Nevertheless, for the

reasons which follow, I do not accept that there is any basis for this contention.

303 Mr Champion’s evidence confirmed that Council support was not necessary in order



to obtain planning approval. According to Mr Champion, local councils were not

supportive of a Masters development in as many as 40 to 50 per cent of cases.910

Despite opposition from the relevant council, which Mr Champion acknowledged

Woolworths had experienced “many times in the past”, he admitted that “in many

instances [Woolworths had] succeeded in overcoming” [that opposition].911 Mr

Champion accepted that while Council opposition was of some concern, it was just

another issue that needed to be worked through.912 As observed by NES, no witness

gave evidence that Council opposition presented an insurmountable obstacle to

obtaining planning permissions.

304 Moreover, the evidence is that, far from being deterred by the position taken by the

Council,913 Woolworths sought the assistance of the Minister for Planning to “fast

track” the planning approval process for each of the key Oxygen stores across

Victoria, including the Strathdale site.914 This approach of seeking Ministerial

assistance was consistent with the Site Selection strategy which expressly

contemplated that Senior Management would lobby the State and Federal

authorities to obtain planning approval where appropriate.915 This decision to lobby

the Minister was also consistent with the recommendations that had been made by

the DIIRD916 and the planning advisers to Woolworths, namely, Urbis.917

305 In any event, on 22 February 2010, the Minister appointed an Advisory Committee,

pursuant to s 151 of the Planning and Environment Act 1987 to report on issues

concerning the proposed location of 12 Woolworths’ hardware concept stores,

including the store to be developed on the Strathdale site.918 The Terms of Reference

for the Advisory Committee stated that:919

The Minister for Planning considers that the proposed new stores are of State

910 Transcript 1198, 1119. 911 Transcript 1080. 912 Transcript 1080. 913 Court Book 2185. 914 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [36]; Transcript 641. 915 Court Book 4560. 916 Court Book 2185. 917 Transcript 942. 918 Court Book 2975. 919 Court Book 2929.


significance given their potential to deliver significant economic and employment benefits, as well as greater retail choice to the Victorian community by increasing retail competition in this sector.

The Terms of Reference for the Advisory Committee stated that the majority of the

sites identified by Woolworths required either a rezoning and, or alternatively, a

planning permit to allow construction of the proposed stores. The Terms of

Reference stated that Woolworths would prepare draft planning scheme amendment

and planning permit documentation to be considered by the Advisory Committee.

Woolworths, together with the relevant councils, government authorities and

affected landowners, were then entitled to make submissions and to be heard by the

Advisory Committee. The Advisory Committee was to make recommendations to

the Minister in relation to the form and appropriateness of the proposed planning

scheme amendments and planning permit applications in a report. The report was

to be made within eight weeks of the completion of hearings.920

306 On 25 August 2010, following hearings into each of the proposed sites, the Advisory

Committee recommended the rezoning of ten of the eleven sites that had been

referred to the Committee by Woolworths.921 On 25 October 2010, the Minister

approved each of the stores that had been recommended. The application for

planning approval for the Strathdale site was not considered by the Advisory

Committee, as it was withdrawn by Woolworths on 6 May 2010 following its

termination of the Agreement for Lease.922 Having withdrawn its application in

respect of the Strathdale site, NES submits that Woolworths now seeks to rely on the

uncertainty of its own creation in order to submit that NES can have suffered no loss

and damage as a result of Woolworths’ termination of the Agreement for Lease,

because the development would not have been approved or constructed. This

submission, it is said, stands in stark contrast to the contemporaneous statements

made by Woolworths in relation to the risks associated with planning approval

having been obtained and the development being realised.

920 Court Book 2929. 921 Court Book 3505. 922 Court Book 3446.


307 In this vein, NES makes reference in its submissions to a letter to the Department of

Planning and Community Development which was sent at a time when Woolworths

had no direct financial incentive to overstate the risks associated with the project. In

that letter, Woolworths said:923

Our planning consultants, Urbis, have undertaken a detailed review of the relevant planning and economic considerations applicable to each of the above sites and consider that each site is consistent with the key planning directions Policy, including Melbourne 2030, Melbourne @ 5Million and the key directions Retail Policy Review.

As per our original request, it is now Woolworths intention to formally seek assistance from the State Government to provide support for a coordinated and expedient planning approval process to facilitate and “fast track” all necessary planning approvals for the above first “block” of development sites.

308 On 14 August 2009, Urbis prepared an advice to Woolworths in relation to obtaining

planning approval for the Strathdale site.924 In that advice, Urbis noted that an out

of centre development would be considered where it could be demonstrated that the

development will be of net benefit to the community.925 Urbis also noted that while

the Strathdale site did not form part of an existing activity centre,926 the majority of

the site was zoned Business 1 and therefore anticipated this sort of development.

Thus, Urbis concluded that “while the quantum of retail floor space will need to be

justified by an economic analysis due to its out of centre location, we consider the

principle of the development of the Product on this site to be acceptable.”927 Urbis

stated that consent could be obtained from the floodplain management authority by

demonstrating that the development will allow the free passage of floodwaters and

will minimise flood damage.928 Urbis said that it was essential that any application

be supported by a robust economic analysis that confirms both the need for

additional restricted retail space and that its introduction will not detrimentally

impact nearby centres such as the Bendigo CBD.929 More detailed analysis was

923 Court Book 2110. 924 Court Book 1243. 925 Court Book 1243. 926 Court Book 1244. 927 Court Book 1244. 928 Court Book 1245. 929 Court Book 1245.


provided to Woolworths by Urbis in November 2009 in a report entitled “Oxygen—

Economic Issues Review”.930 The September 2009 Urbis report concluded that there

were not any particularly significant economic issues in relation to the site; the

sequential test of alternative locations recommended in the Retail Policy Review

appeared to be met, as did the strategic assessment of the proposal. Urbis concluded

that there were no other appropriate sites in centre, it was highly unlikely there were

appropriate sites in an edge of centre location, the proposed site was appropriate for

this type of development, the site provided access to a sufficient catchment, there

was a need for the development, the development would not impact on the

established Activity Centre Hierarchy and that the proposed development would

improve and not adversely impact the availability of goods and services.

309 Despite Urbis having been engaged by Woolworths to prepare the draft planning

documentation for the Advisory Committee and having advised Woolworths in

relation to the likelihood of the planning amendments being recommended by the

Advisory Committee in relation to the Bendigo site, and despite Woolworths having

relied on the “detailed review” prepared by Urbis of the relevant planning and

economic considerations applicable to the Strathdale site in submissions to the State

Government at the time, Woolworths elected not to call Urbis to give evidence in

this proceeding. Thus, NES submits, it must be assumed that—applying the rule in

Jones v Dunkel931—any such evidence would not have assisted in its case and would

have at least supported the views set out in its report932 and Woolworths’ own

contemporaneous documents.933 Instead, Woolworths seeks to rely on the expert

evidence of Mr McGurn, whose principal conclusion is that “a lack of detailed

analysis and expert reports supporting the proposal ... has the effect of creating

uncertainty with respect of the likely success (or otherwise) of any application being

supported by the ‘Project Oxygen’ Advisory Committee.”934 The evidence of

Mr McGurn included evidence that he was instructed that, as a consequence of

930 Court Book 5749. 931 (1959) 101 CLR 298. 932 Court Book 5749. 933 Court Book 2110–1. 934 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [9].


Masters giving written notice to terminate the Agreement for Lease on 6 May 2010,

Woolworths advised the Advisory Committee that it no longer intended to proceed

with the proposed development of the Strathdale site. As a result, comprehensive

plans, reports and analyses normally required to assess such a proposal were not

prepared.

310 Given the unavailability of more detailed information, Mr McGurn relies on what he

describes as preliminary reports and site planning undertaken by Urbis and Pitney

Bowes for Woolworths in 2009. While both the Urbis and Pitney Bowes reports

support the rezoning of the Strathdale site, Mr McGurn states in his report that:935

[W]hilst it is claimed in the Urbis report that the sequential test was likely to be satisfied there is no detailed analysis underpinning this opinion. Indeed a number of detailed reports would have been required to be prepared, such as economic analysis, traffic and access, urban design and environmental impacts to support any proposal.

311 Despite being limited by the information provided to him, Mr McGurn nevertheless

concludes in his report that:

(a) The (residential) zoning of part of the Bendigo site appeared to be an anomaly

that created uncertainty in relation to the use and development of the land;936

(b) While the site was not within an established activity centre,937 there were a

number of locational factors that can be considered positive attributes for the

intended use of the site;938

(c) In the four out-of-centre locations supported, the Advisory Committee was

satisfied that the sequential test could be achieved as well as the overarching

matters set out in Mr McGurn’s report;939

(d) The Urbis report concluded that the proposal would likely have passed the

935 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [141]. 936 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [77]–[80]; Statement of Town

Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [64]; Transcript 565. 937 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [85]–[86]. 938 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [93]. 939 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [123].


sequential test;940

(e) On the basis of the analysis prepared by Urbis and Pitney Bowes in economic

terms the proposal may well have been successful and would not have

compromised the role and viability of other stores and centres;941

(f) The Project Oxygen rollout program was considered to be of State

Significance but this did not mean the proposals would have been supported

“at any cost”;942 and

(g) While “there was no certainty” that the Advisory Committee would have

supported the proposal,943 there would have been some obvious locational

advantages of the site and some support for the proposal in relation to the

economic and competition benefits.944

312 It appears, however, that the only material obstacles to obtaining planning approval

identified by Mr McGurn, who did not disagree with the conclusions reached by

Urbis or Pitney Bowes, were that the site was not located within an established

activity centre,945 which concern is addressed by the application of the sequential

test, Council’s concerns about adjacent residents946 which Mr McGurn admitted was

not determinative, and what can only be inadmissible speculation about limitations

that may or may not have been imposed by the NCCMA as a result of the

Inundation Overlay.947 NES also emphasises that these conclusions are based solely

on the contents of the NCCMA letter of 18 May 2012, to which it objects,948 and other

documents said to be inadmissible, including an email of 24 October 2012 and a plan

from Urban Design and Management which are also objected to.

313 On the other hand, the evidence of Mr Biacsi, the planning expert called by NES, is

940 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [137]. 941 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [137]–[139]. 942 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [143]. 943 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [145]. 944 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [144]. 945 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [85]–[86]. 946 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [88]–[92]. 947 Statement of Town Planning Evidence Prepared by Stuart McGurn (April 2015) [95]–[104]. 948 See above [286]–[289].


that:

(a) There would have been a good case for supporting the rezoning of the subject

land to facilitate an Oxygen store on the site;949

(b) The proximity of a nearby residential development was not a constraint upon

the rezoning of the land;950

(c) The likelihood of rezoning was supported by:

(i) The land already being substantially zoned for commercial

development with the majority of the land being zoned as Business 1;

(ii) Despite the land being in an out-of-centre location, rezoning could

reasonably have been justified on “net community benefit” grounds

under the planning scheme;

(iii) The land was proximate to the homemaker market and developing

areas of Greater Bendigo and enjoyed good access;

(iv) The land is of approximate size and proportions to reasonably

accommodate the Oxygen store development;951

(d) Had the application for rezoning been maintained and actively supported by

Woolworths it is likely that the Advisory Committee would have supported

the rezoning to facilitate the Oxygen store;952

(e) Had the Advisory Committee recommended the rezoning, the Minister

would likely have acted on that recommendation;953

(f) In the event that Woolworths had maintained its commitment to the rezoning

application and resourced it to the same extent it resourced other Oxygen

949 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [64]. 950 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [65]. 951 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [66]. 952 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [68]; Transcript 563. 953 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [69].


store applications, and had the Advisory Committee supported the rezoning,

it is likely that the rezoning would have occurred;954

(g) Any concerns raised by the Council would have been assessed in the context

of planning policy and the public interest. The economic arguments

favouring the Oxygen program were persuasive and would have been a

significant factor in convincing the Advisory Committee of the acceptability

of rezoning;955 and

(h) In order to determine what (if any) conditions may have been imposed by the

NCCMA as a result of the proximity of the land to Racecourse Creek it would

first be necessary to clarify the NCCMA’s position. The reference to a setback

of 30 metres per cl 14.02–1 of the State Planning Objectives would also need to

be clarified. This clause identifies strategies intended to guide decision

making and must be read in the context of applicable planning controls. It is

a guideline and not a statutory requirement mandating strict or absolute

compliance. The applicable planning controls contemplate circumstances

where development may be acceptable within this setback.956

I accept that, as submitted by NES, cross-examination of Mr Biacsi on whether it was

not possible to predict how the Advisory Committee would have acted “with any

certainty”957 can be of no assistance to the Court whose task it is to ascertain what

NES has lost by reference to degrees of possibilities or probabilities, not certainties.958

314 It is also submitted by NES that it is open to the Court to find, and the Court should

find, that had it not been for Woolworths’ breaches of cl 2.2 of the Agreement for

Lease which resulted in Woolworths withdrawing its application for planning

approval for the Strathdale site prematurely, Urbis would have completed its task of

preparing the draft planning scheme amendment in permit documentation and

954 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [84]. 955 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [71]. 956 Statement of Town Planning Evidence Prepared by Andrew Biacsi (15 April 2015) [74]–[75]. 957 Transcript 548. 958 Price Higgins & Fidge v Drysdale [1996] 1 VR 346 at 354.


submissions to the Advisory Committee. Those documents would, it is said, have

been consistent with the Urbis Report of November 2009, to which reference has

been made, and Woolworths’ letter to the State Government.959 The fact that the

preparation of these detailed reports was not completed is an issue of Woolworths’

own creation which was brought about by its own breach that has been further

exacerbated by its election not to call evidence from Urbis in this proceeding. As

submitted by NES, it is well established that a party cannot, either directly or

indirectly, benefit from its own wrongdoing960 or rely on any event brought about by

his or her own breach of contract.961 In New Zealand Shipping Co Ltd v Société des

Ateliers et Chantiers de France, Lord Chancellor Finlay described this principle as a

principle of law that ”no one can … take advantage of the existence of a state of

things which he himself produced.”962 This principle is not limited to cases in which

a party relies on its own wrongdoing to avoid a contract.963 Thus, having brought

about this state of affairs by their own breach of contract, it would be unjust to

permit Woolworths to rely on the absence of the reports that it had committed to

prepare in order to reduce the damages that would otherwise be payable to NES. To

do so would, in my view, be to permit Woolworths to benefit from their own

wrongdoing.

315 For the preceding reasons, on the basis of the evidence, it is open to the Court to

find, and the Court should find, that, had Woolworths acted in accordance with its

contractual obligations, planning approval would more likely than not have been

obtained for the Strathdale site; just as approval had been obtained for all but one of

the key Oxygen stores in other parts of Victoria.964

Would NES have realised the opportunity to develop and lease the Bendigo site?

316 Woolworths’ contention that any opportunity lost by NES was of no value as NES

959 Court Book 2110–1. 960 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 441. 961 Cheall v Association of Professional Executive Clerical and Computer Staff [1983] 2 AC 180 at 188–9. 962 [1919] AC 1 at 6. 963 Alghussein Establishment v Eton College [1988] 1 WLR 587. 964 Court Book 2110.


could not have developed the site should, for the preceding reasons and those which

follow, be rejected. Woolworths’ submissions to this effect do, in my view, overstate

the risks associated with the development of the Strathdale site. In this context, NES

submits that Woolworths’ submissions to this effect are a recent invention and for

the purpose of reducing Woolworths’ liability in this proceeding. For the reasons

which follow, I am of the view that these submissions are justified.

317 The present position contended for by Woolworths is in marked contrast to the

position taken in relation to the risks of development as stated by Woolworths in its

correspondence with the Department of Planning and Community Development,

namely:965

We are pleased to advise that Woolworths have now secured 13 development sites … within Victoria for which we intend to lodge formal development applications. …

We advise that each of these sites are “shovel ready” subject to planning approval. … We also advise that the developers responsible for construction of the above leasehold sites are also in a position to commence construction immediately following planning approval.

318 In relation to the prospects for obtaining planning approval, Woolworths relied on

its advice from Urbis that the application in respect of each site was “consistent with

the key planning directions Policy, including Melbourne 2030, Melbourne @ 5Million

and the key directions Retail Policy Review.”966 On the material before the Court, it

does appear that the pessimistic view of the prospects for the development which

are now taken by Woolworths are self-serving and are not divorced from the

relationship, the direct relationship, between Woolworths’ liability for damages in

this proceeding and the risks of the development being completed.

319 For the preceding reasons, NES submits, in my view correctly, that it is open to the

Court to find, and that the Court should find, that but for the withdrawal of

Woolworths’ support for the development, the development would have proceeded

and the benefits promised under the Agreement for Lease would have been realised.

965 Court Book 2110 (Plaintiff’s emphasis). 966 Court Book 2110.


Thus, I turn to the remaining question, what is the value of that lost opportunity?

Quantification of loss

If NES has lost a valuable opportunity, what was that opportunity worth?

320 The central and critical question in determining the quantum of loss and damage is

what amount of compensation is necessary to put the injured party in the same

position it would have been in had the breach of contract not taken place.967 Where

the loss is the loss of a commercial opportunity, the question becomes what is the

value of that commercial opportunity and what discount should be applied to reflect

the risks that the commercial opportunity may not have been realised. To this point,

the ground is common between the parties. Woolworths, however, contend that in

any event, NES has not lost any commercial opportunity of meaningful value. In

relation to the applicable methodology in the present circumstances, Woolworths

submit that, as a starting point, it is necessary to ascertain the value of the

commercial opportunity in the—as it says—highly unlikely event it would have

transpired. In this respect, Woolworths say that the evidence shows that NES would

have made a loss in undertaking the development.

321 Secondly, Woolworths submit that the evidence demonstrates that there was a high

probability that NES would have been unable to complete the development at all, as

it would have been unable to obtain the necessary finance and planning permits for

the development and for other reasons advanced in the Woolworths submissions

which have already been considered in these reasons. As indicated in the preceding

reasons, I do not accept that there was a high probability that NES would have been

unable to complete the development at all.

322 Thirdly, it is submitted that, in accordance with the principles set out in Sellars, a

significant discount needs to be applied to the determined value of the commercial

opportunity.968

967 See above [249]–[251]. 968 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.


Valuing the lost opportunity

323 As discussed previously, NES contends that the opportunity that it has lost is the

opportunity to realise the rental returns promised under the Lease to Masters, along

with the value of the Site at the conclusion of the Lease. Moreover, it says that NES

has saved, and must account for, the costs of completing the development and

maintaining the site for the duration of the Lease. For the reasons indicated

previously, I accept that this is the proper characterisation of the opportunity lost,

thus the question becomes, how should that loss be valued?969 Clearly assessment of

value and associated risks almost 40 years into the future is difficult and carries a

degree of uncertainty.970 Nevertheless, this reality is, in my view, accommodated in

the methodology adopted.

Appropriate methodology for assessing value of lost opportunity

324 The experts called by the parties agreed as to the appropriate methodology to be

applied to assess the value of any commercial opportunities lost by NES. The

evidence of the valuation expert called by NES, Mr Owain Stone, is that the

appropriate methodology to assess the value of the alleged lost opportunity to NES

is to compare the cash flows NES would have incurred or earned if the development

had gone ahead, with the actual cash flows it did incur (“actual versus but for

analysis”).971 Mr Stone expressly stated that this methodology is the appropriate

one, even though he understood that NES had no intention of selling the site upon

completion of the development.972 The alternative methodology relied upon by

NES, which is discussed in the reasons which follow, was put to, but Woolworths

submits not accepted by, Mr Stone as an appropriate methodology. Woolworths’

valuation expert, Ms Dawna Wright, agreed that the actual versus but for analysis

adopted by Mr Stone is the appropriate methodology,973 and criticised the

alternative methodology put forward by NES.974 Woolworths do, however, submit

969 See above [255]. 970 Defendants’ Closing Submissions (3 September 2015) [318]–[328]. 971 Expert Report of Owain Stone (1 May 2015) [35], [61]. 972 Expert Report of Owain Stone (1 May 2015) [67]. 973 Expert Report of Dawna Wright (13 May 2015) [2.1.3], [4.1]–[4.2]. 974 Expert Report of Dawna Wright (13 May 2015) [2.2.4], [5.3.1]–[5.3.5].


that while Mr Stone applied the correct methodology, his assessment of the value of

the commercial opportunity is wrong as it relied upon a number of assumptions that

are inaccurate.975 However, for the preceding reasons, I am of the opinion that Mr

Stone’s assumptions are reasonable in the circumstances, particularly with respect to

the quantum and payment of the Landlord’s Works Costs.

325 In its particulars of loss dated 4 May 2015, NES asserted that the value of its loss

should be calculated by adding the net present values of:

(a) the “loss of rental surplus”, being the net rental income NES would have

achieved during the term of the Lease (assuming all six options to renew were

exercised and the Lease ran for the maximum 42 years); and

(b) the “capital loss” or “net equity”, being the capital value of the land less any

loan balance as at the conclusion of the Lease (assuming all options were

exercised and the Lease ran for the maximum 42 years).

(“the Alternative Methodology”).

326 Woolworths contends that there is no evidence to support adopting the Alternative

Methodology for assessing loss. Assessing the future value of a property by

separately valuing the rental income expected to be earned in the intervening period

and the land as at a future date, that is, at 2052, is said not to be a normal approach

to property valuation. Moreover, it is submitted by Woolworths that in almost 30

years’ experience as a property valuer, Woolworths’ expert property valuer,

Mr Jackson, gave evidence that he had never heard of such an approach being

applied to a property such as the Strathdale site.976 Moreover, Woolworths contends

that it is telling that:

(a) the Alternative Methodology was put to Mr Stone by a supplementary letter

of instruction issued on the same date that he provided his initial report;977

975 Defendants’ Closing Submissions (3 September 2015) [329]–[367]. 976 Transcript 1250–1. 977 Expert Report of Owain Stone (1 May 2015) Appendix E.


and

(b) while the Alternative Methodology was put to Mr Stone, he did not adopt

it.978

327 In accordance with his supplementary instructions, Mr Stone simply performed an

act of calculation by applying the basic formula put to him—Loss = NPV of A + NPV

of B—to inputs that he was instructed to assume. Woolworths say, however, that it

is clear that Mr Stone does not regard the sum he derived by applying the

Alternative Methodology to be reflective of the loss suffered by NES.979

Additionally, Woolworths submits that the Alternative Methodology is dangerous

and unreliable because, among other defects, it requires the Court to rely on

projections of income that will be earned over a long period and to rely on an

estimate of the value that a particular property will have over 40 years into the

future.

328 Finally, Woolworths observe that NES did not lead any evidence as to the value of

the property at the end of the Lease—that is, in 2052—or the appropriate risk rate to

apply in projecting the income that may be earned over a 42 year period.

Cash flow methodology

Comparison of cash flows

329 As has been observed, Mr Stone gave evidence that in his opinion, an appropriate

methodology for assessing the loss and damage suffered by NES was to determine

the difference between the cash flows which NES would have incurred had the

development gone ahead and the actual cash flows it did incur. Ms Wright agrees

with this approach,980 as does Mr Jackson.981 As set out below Mr Stone uses the

value of the completed development as a proxy for the cash flows the property could

978 Expert Report of Owain Stone (1 May 2015) [59]–[62]. 979 Expert Report of Owain Stone (22 May 2015) [33]. See also Expert Report of Owain Stone (1 May 2015)

[67]. 980 Expert Report of Dawna Wright (13 May 2015) [2.1.2]. 981 Expert Report of Grant Jackson (15 May 2015) [33]–[44].


have achieved. To this he added Masters’ contribution amount as an estimate of the

total revenues the property would have generated.

330 Mr Stone derives this value by identifying the total cash flows that NES would have

earned had the development been completed and deducting the costs that NES has

saved by the development not proceeding.982

Valuing the cash flows that would have been achieved

331 It is the appropriate method of valuing the cash flows that NES would have earned

which is in dispute. Mr Stone estimates the value of the cash flows that NES would

have earned by two different methods. Question 6, which was put to Mr Stone in

the initial instruction letter dated 20 March 2015, asked:983

In your opinion what types of costs (excluding those that are in your opinion minor) would have been incurred by NES in order to complete the development and to lease the site to Woolworths (including the cost to purchase the land, the Landlord’s Works Costs and the finance costs)?

In his answer to this question, Mr Stone estimates the value of the development on

the date of completion, applying the Discounted Cash Flow method, as a “proxy” for

the future cash flows the property may have generated.984 Question 9, as set out in

the additional letter of instructions dated 1 May 2015, asked:985

In your opinion, what net equity (being the difference between the capital value of the land less any loan balance) would there have been in the Bendigo Property as at the conclusion of the 42 year lease?

And in the same additional letter of instructions, Question 10 asked:986

What would the net present value of the answer to [Question 9] be at 6 May 2010 (applying the same discount rate as in answer to [Question 2] above to reflect the time value of money)[?]

Mr Stone, in his answers to Questions 9 and 10, estimates the value of the cash flow

directly, using the Discounted Cash Flow method for the rent earned over the Lease

982 These costs included the cost of purchasing the land and constructing the development as well as

borrowing costs and stamp duty. 983 Expert Report of Owain Stone (1 May 2015) Appendix D [4.7]. 984 Expert Report of Owain Stone (1 May 2015) [39], [67]. 985 Expert Report of Owain Stone (1 May 2015) Appendix E [3.3]. 986 Expert Report of Owain Stone (1 May 2015) Appendix E [3.4].


and the Capitalisation of Income method for the residual value of the property at the

end of the lease.987 In both cases, where Mr Stone uses the Capitalisation of Income

method he arrives at an “illustrative” value of the property by applying a notional

yield. In this respect, Mr Stone says in his report: “I understand that property values

are often derived by dividing rental value by an assumed yield.”988 The valuation is

illustrative as, while Mr Stone is an experienced business valuer, he is not a property

valuer and does not have the expertise to determine what yield should be applied.989

332 Similarly, Ms Wright is not a specialist property valuer and it is for this reason that

Mr Jackson and Mr Sutherland provide expert opinions as to the yields that may be

applied to the calculations performed by Mr Stone and Ms Wright. There is, in my

view, no difficulty with this approach as it is well accepted that the Court can accept

the evidence of one expert in relation to one issue, such as methodology, and the

evidence of another expert in relation to a separate issue, such as the applicable

yield;990 all the more where their expertise is complementary.

The Discounted Cash Flow method

333 Question 8 as set out in the additional letter of instructions to Mr Stone dated 1 May

2015 asked:991

What would the net present value of that stream of net revenue or surplus rent have been as at 6 May 2010?

In performing this calculation, please apply a discount rate that you consider to be reflective of the time value of money over this period.

In his answer to this question, Mr Stone values the stream of net rent that could have

been earned under the lease using the Discounted Cash Flow methodology. This

methodology, which is common, involves calculating the net present value of pre-tax

cash flows. Moreover, in addressing this question, Mr Stone says, with respect to tax

987 Expert Report of Owain Stone (1 May 2015) [43], [44]. 988 Expert Report of Owain Stone (1 May 2015) [89]. 989 Expert Report of Owain Stone (1 May 2015) [38]. 990 Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 453. 991 Expert Report of Owain Stone (1 May 2015) Appendix E [3.3].


on lost cash flows:992

70. It is necessary to consider whether the plaintiff would have paid tax on the estimated Lost Cash Flow. In addition, consideration should be given to the rate at which tax would have been paid, the availability of any tax losses, and the timing of any tax payments.

71. I have not been provided with any details relating to NES’s tax position.

72. If the Lost Cash Flows would have been subject to income tax then in my opinion the loss and damage should be based on post-tax cash flows since that is what the plaintiff has lost.

More particularly, Mr Stone answers Questions 7 and 8 as follows:993

92. I have set out the surplus rent calculations that NES would have achieved over the 42 year term of the Lease in Appendix C.

93. The net present value of that stream of surplus rent as at 6 May 2010 is $11.073 million.994

94. In performing this calculation I have applied a discount rate reflective only of the time value of money over this period. I have assumed this rate to be 5.4 per cent per annum, based on the 10-year Commonwealth Bond rate as at 6 May 2010.

Assumptions

95. In estimating the above figures I have made the following assumptions based on instructions provided to me (these are in addition to the assumptions set out at para 8):

a. That NES would have incurred running costs of $32,000 per annum; and

b. That construction would have commenced around October 2010 and would have completed eight months later ie around June 2011.

96. In estimating the above figures I have made the following assumptions which are additional to the assumptions I have been instructed to make:

a. That the lease period would have commenced on 1 July 2011;

b. That cash flows would have occurred on average half way through each year;

992 Expert Report of Owain Stone (1 May 2015) [70]–[72]. 993 Expert Report of Owain Stone (1 May 2015) [92]–[96]. 994 This assumes the Masters contribution would have been received at the start of construction.

Assuming the contribution would have been received at the end of construction changes this figure to $10.909 million.


c. That the rental receipts would have been increased at actual CPI995 up to June 2014 and 2.5%996 per annum thereafter.

d. That NES would have incurred no other costs associated with holding the property;

e. That NES would not have used the surplus rent to reduce the outstanding loan from Bendigo Bank; and

f. That Bendigo Bank would have capitalised the interest on the loan during the construction phase.997

Mr Stone calculates the end or exit value of the property at the end of the Lease—

when the land may be sold—using the Capitalisation of Income method based on the

rent that the property would have earned in the last year of the Lease and the yield

that applied on the date of his report.998 This assumes that the property would have

been properly maintained and could continue to have realised that level of rent.

Where the Lease required the property to be maintained and the rent was fixed to

the lesser of CPI or 4 per cent—which does not even preserve the real value of the

rent—NES submits that this assumption is not unrealistic.

334 Ms Wright values all cash flows from the property—both the future and rental

income and the end value of the property—using the Discounted Cash Flow

method, using the rent during the first year of the Lease and the yield applicable as

at the date of completion of the development.999

335 Moreover, NES makes reference in its submissions to material with respect to the

Discounted Cash Flow method by Lonergan in the text, The Valuation of Businesses,

Shares and Other Equity:1000

995 Index: All groups CPI; Melbourne. 996 The RBA Statement on Monetary policy dated February 2015 states that the CPI forecast for the next

two years ranges from 1.25 per cent to 3.25 per cent. 997 I have made this assumption despite the fact that I had been instructed that the more likely scenario

would have been that NES would have paid interest during the construction phase. However, to assume this would have meant that my calculation would have excluded this interest cost. It is, in my opinion, irrelevant where the funding for the interest during the construction phase would have come from, whether it would have been from the bank or funded by the Plaintiff. It is a cash flow of the Plaintiff regardless of its source.

998 Expert Report of Owain Stone (1 May 2015) [43], [44]. 999 Court Book 5515. 1000 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 376

(Plaintiff’s emphasis).


Returns from property comprise net income plus capital appreciation. However certain types of property are purchased primarily for their potential to increase in capital value (for example, land suitable for sub-division, vacant CBD sites etc.) while others are purchased primarily for their annual net income (for example, fully let shopping centres in fully developed areas). The former are generally valued using the hypothetical development method of valuation. The latter are valued as the present value of the expected future cash flow from net rental income plus the expected end or exit value of the property at the end of the period.

Thus it is said that the Hypothetical Development method to which reference is

made, which is a derivative of the Discounted Cash Flow methodology, which is

used to value property acquired with the intention of developing and then selling it,

involves deducting the costs of development from the estimated proceeds of sale as

at the date of completion. The proceeds of sale may be calculated by discounting the

expected cash flows or capitalising those cash flows to arrive at a value at

completion of the development.1001

The Capitalisation of Income method

336 The Capitalisation of Income method involves valuing the property by capitalising

the (pre-tax) net rental income the property produces at a capitalisation rate based

on the yield reflected in contemporaneous sales of comparable income producing

properties.1002 Lonergan comments in The Valuation of Businesses, Shares and Other

Equity, that the Capitalisation of Income method assumes a continuation of the rental

income at the date of the valuation.1003 For this reason NES submits this method is

not applicable for valuing the rent, which was not fixed under the Agreement for

Lease. The Capitalisation of Income method also assumes that the potential for

rental and capital growth risks associated with investing in the property and any tax

deductions available to an owner are all reflected in the yield.1004 While it is

accepted that the yield1005 will implicitly incorporate some discount to reflect the

purchaser’s—or the market—perception of the risks associated with the cash flows

1001 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 378. 1002 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 371. 1003 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 371. 1004 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 371. 1005 Which is no more than the relationship between the rental return of a property and its purchase price

at the time of sale.


from the property being achieved, at the point of sale, it will also necessarily

incorporate other dynamics of the market (such as supply and demand, interest rates

etc.) at the time of sale.1006 It is for this reason that market yields change over time.

These market dynamics bear no relationship to the risks associated with achieving

the particular cash flows in question.1007

337 This is not to say that the Capitalisation of Income method has no application. On

the contrary, NES does accept that where the property is to be sold, or the cash flow

capitalised, at or near the time of valuation, at which point the dynamics of the

market will be highly relevant to the price achieved, the valuation of the property by

this method may be appropriate. It is for this reason that the method is appropriate

to value the property at the end of the Lease when it may realistically be sold. In

contrast, where the property is to be sold, and the income capitalised, at a much later

point in time, under different market conditions, the application of this method,

which assumes the risk of cash flows being achieved is reflected in the yield, which

yield is derived under different market conditions, may not be appropriate. It is for

this reason that NES does not accept the use of the Capitalisation of Income method

to value the cash flows of the property “at the date of completion of the

development”.1008 Another reason that the selection of a yield that is reflective of the

underlying risks of achieving the cash flows in question is that the Capitalisation of

Income method of valuation is extremely sensitive to the yield selected with a

percentage change in the yield having a disproportional effect on value.1009

338 The Capitalisation of Income method is also highly dependent on there being

sufficient sales of “truly comparable properties” at or around the valuation date to

allow an appropriate yield to be identified.1010 The evidence reveals that there had

1006 See Expert Report of Grant Sutherland (27 May 2015) [51]. 1007 It is for this reason that the same income producing property, attracting the same rent, can sell for

different amounts. See, eg, the Masters store at Williams Landing: Court Book 5530; Expert Report of Grant Sutherland (27 May 2015) [53]).

1008 Plaintiff’s Closing Submissions (3 September 2015) [463]. 1009 See, eg, Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed,

2003) 373 where a 1 per cent change in yield results in a 21 per cent increase in value. See also Transcript 1237.

1010 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 373.


been no sales of Masters stores at the time when Woolworths contend NES’s cash

flows should be valued. There had been a small number of sales at the date

Mr Sutherland derives his yields for the purpose of Mr Stone’s end value estimate.

339 In applying the Capitalisation of Income method the yield to be applied is selected

based on observable market yields from the sale of comparable properties. The yield

is determined by dividing the price by the rental return.

340 Given the relationship between the market dynamics and yields, and the critical role

that yields play in this methodology, Lonergan, in The Valuation of Businesses, Shares

and Other Equity, states that in determining the yields property valuers should

consider the underlying supply and demand dynamics of the market including the

level of development activity.1011

341 In selecting the yields that Woolworths’ submit should be applied as at the date of

completion, Mr Jackson appears to have given no consideration to these matters

including the time at which the property was likely to be sold, the level of interest

rates, foreign investment or falling yields which are a significant contributing factor

to the yield selected, but may be entirely inapplicable when the property is

eventually sold and the equity in it realised. Mr Sutherland has taken those matters

into account in selecting an appropriate yield at the date of his report, as a proxy for

the yield that might apply at the end of the Lease.1012

The validity of the Discounted Cash Flow method for valuing the cash flows

342 In circumstances where NES purchased the Strathdale site for the purpose of earning

and retaining the annual net income from Masters, and did not intend to sell the site

during the life of the Lease, NES submits that the more appropriate method of

valuing its loss is to value the stream of net rent NES would have earned over the life

of the Lease—using the Discounted Cash Flow method which has been described—

and adding the net present value of the end value of the property using the

1011 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003)

372–3. 1012 Expert Report of Grant Sutherland (27 May 2015) [51].


Capitalisation of Income method at the end of the Lease. This involves calculating

the present value of the expected future cash flow from the net rental income plus

the exit value of the property at the end of the Lease. This is consistent with valuing

the loss as the loss of the value of the Lease plus the loss of the residual value of the

land as an income producing property.

343 Mr Jackson accepted in cross-examination that valuing the net present value of

income under the lease and the exit value of the property was a valid alternative to

the Capitalisation of Income method.1013 Ms Wright also accepted in cross-

examination that valuing the stream of cash flows using the Discounted Cash Flow

method may be appropriate where the cash flows are known—as is the case here

with net rental.1014 In order to ensure that risks associated with achieving the cash

flows from the development were not double-counted, Mr Stone was asked to apply

a risk-free discount rate which reflects only the time value of money. Ms Wright also

accepted in cross-examination that the incorporation of the same risks into a

discount rate and Sellars discount may result in double counting of those risks.1015 It

follows that the risks would be double counted if the same risks are incorporated

into the discount rate applied under the Discounted Cash Flow method and then a

Sellars discount were to be applied by the Court.

344 NES accepts that where a risk free discount rate has been used (as is the case for

Mr Stone’s estimate of the value of net rent in answer to Questions 7 and 8 of his

report1016), a Sellars discount will be applied by the Court to reflect the risks of the

cash flows not being achieved.1017 Where the Capitalisation of Income method is

applied, a Sellars discount should apply to only those risks that preceded the

valuation date as all post-valuation risks are assumed to have been incorporated into

the market yield; assuming the properties from which the yield is derived are truly

compatible.

1013 Transcript 1251–2. 1014 Transcript 1372. 1015 Transcript 1394. 1016 See above [333]. 1017 Transcript 1378.


The application of the Discounted Cash Flow method

345 On this basis, and in answer to Questions 7 to 11 of his instructions, Mr Stone

calculated the net present value—as at the date of breach—of the stream of surplus

rent NES would have earned under the Lease. The net present value of that stream

of revenue was estimated to be $11.073 million using a risk-free discount rate of

5.4 per cent being the 10 year Commonwealth Bond Rate.1018 Ms Wright gave

evidence that the 10 Year Bond Rate as at 6 May 2010 was 5.54 per cent,1019 which

was accepted by Mr Stone1020 and incorporated in the amended calculations

provided to the Court. According to Mr Stone’s amended calculations, using the

Discounted Cash Flow method, the net present value of the net rent over the life of

the Lease, as at the date of breach, was estimated to be $10,722,842.1021 Mr Stone then

calculated an illustrative net present value of the exit value of the property as at the

end of the Lease (using the Capitalisation of Income method). The estimate was

illustrative as it was based on an assumed yield.1022

346 When the yields identified by Mr Sutherland (of 6.5 per cent to 6.75 per cent) as at

the date of his report—being the date closest to when the property would

realistically have been sold—were incorporated into this calculation, along with the

rental return in the last year of the Lease, the net present value of the exit value of

the property at the end of the Lease was estimated to be between $3,705,216 and

$3,906,035.1023 This results in a net present value of stream of surplus rent and net

present value of the exit value of the land, using the Discounted Cash Flow method,

of between $14,428,058 and $14,628,876 or approximately $14.5 million.

347 NES submits that this estimate accurately reflects the true value of the lost

opportunity suffered by NES as a result of the wrongful termination of the

Agreement for Lease by Woolworths. It does follow, of course, that, being the loss of

an opportunity, an appropriate discount must be applied to this estimate of loss, in

1018 Expert Report of Owain Stone (1 May 2015) [93]. 1019 Expert Report of Dawna Wright (13 May 2015) [2.2.2]. 1020 Expert Report of Owain Stone (22 May 2015) [28]. 1021 Court Book 5985. 1022 Expert Report of Owain Stone (1 May 2015) [102], Appendix C. 1023 Court Book 5985–6.


accordance with the principles in Sellars, to reflect the possibility that the outcome

may not have been achieved.1024 The appropriate discount to be applied to NES’s

risk-free loss of $14.5 million is considered in detail in the reasons which follow.

Valuing the cash flows together as at the date of completion

348 Question 1, which was put to Mr Stone in the initial letter of instructions dated

20 March 2015, asked:1025

In your opinion, what is the appropriate methodology to assess the loss and damage suffered by NES as a result of the development not proceeding?

In answer to Question 1, Mr Stone estimates the value of the development on the

date of completion, applying the Capitalisation of Income method, as a “proxy” for

the future cash flows the property may have generated.1026 On the basis of an

assumed yield of 7 per cent Mr Stone then arrives at an illustrative estimate of NES’s

loss and damage1027 as at the date of termination of the Agreement for Lease.1028 Mr

Stone says he believes yields range between 6 per cent and 9 per cent, but that there

is no publicly available data in relation to yields on properties such as this one.1029

When Mr Sutherland’s yield of between 6.5 per cent and 6.75 per cent1030 is applied,

this method results in an estimate of NES’s loss and damage as between

$4,005,7011031 and $4,739,923.1032 That is, at least $4 million. NES submits that this is

the lowest measure of NES’s loss and damage open.

349 The principal reason that this method results in an estimate of loss and damage that

is materially lower that the Discounted Cash Flow method as discussed is that, by

applying a yield to all cash flows the Capitalisation of Income method heavily

discounts both the net rental return and the residual equity in the property to reflect

the market conditions and (it is assumed) the market’s perception of the risks of the

1024 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332. 1025 Expert Report of Owain Stone (1 May 2015) Appendix D [4.3]. 1026 Expert Report of Owain Stone (1 May 2015) [67]. 1027 Expert Report of Owain Stone (1 May 2015) [39]. 1028 Expert Report of Owain Stone (1 May 2015) [58]. 1029 Expert Report of Owain Stone (1 May 2015) [89]–[90]. 1030 Expert Report of Owain Stone (1 May 2015) [59]. 1031 Based on a yield of 6.75 per cent. 1032 Based on a yield of 6.5 per cent.


cash flows not being achieved, as at the date of completion. This method would

apply where NES intended to sell the property as at the date of completion. By

comparison, the Discounted Cash Flow method leaves the Court to apply a Sellars

discount to the risks associated with NES achieving the net rent promised under the

Lease (a task NES says the Court is better placed to do than the “market” for

purchasers of Bunnings stores as at the completion date) and applies the discount

the market would apply to the residual value of the land (the yield) as at the date of

the proceeding which NES says is more reflective of the market into which it may

have sold.

350 If, however, the Capitalisation of Income method is applied and the cash flows

capitalised as at the date of completion, NES submits that any Sellars discount

should be limited as this method implicitly incorporates into the yield a discount for

risks associated with the underlying cash flows being achieved.1033 As such, any

Sellars discount should be limited to any pre-completion risks. However, for the

reasons which follow, I am of the view that the Capitalisation of Income method as

at the date of completion is not the most appropriate method of estimating NES’s

loss and damage in this case as it would not fully compensate NES for the

opportunity that it has lost.

Issues with valuing cash flows as at the date of completion

351 Although the Capitalisation of Income method is a common method—and a simple

method—of valuing income producing properties, it is not the only method nor is it

the most appropriate method in every circumstance. Thus, in Challenger Property

Asset Management Pty Ltd v Stonington City Council, I said:1034

It is clear from the authorities that, depending on the particular circumstances, different methods of valuation may be appropriate. The courts have not adopted a prescriptive position with respect to valuation methodology and care should be taken to ensure that no single process of reasoning is elevated into a statement of principle.

Consequently, in selecting and applying a valuation methodology careful

1033 Expert Report of Owain Stone (1 May 2015) [67]. 1034 (2011) 34 VR 445 at 456–7 [24] (citations omitted).


consideration must be given to the reality of the marketplace including the

circumstances in which the property to be valued would have been sold.1035

352 In the present case, one fact that is critical to the valuation of NES’s lost opportunity,

is that NES did not intend to sell the Strathdale site upon completion but instead

intended to hold onto the Strathdale site for the duration of the Lease in order to

realise the full benefits of the rent payable by Masters under the Lease and any

capital appreciation over that time.1036 This fact is of particular significance given

that the market yields for investment properties have been decreasing over time.

The evidence of Mr Sutherland was that:1037

It is evident from a review of the sales evidence that capitalisation rates [(yields)] have continued to decline due to the historically low interest rate environment and as a result of the extremely competitive investment market, including a strong involvement of offshore, largely Chinese purchasers.

Moreover, Mr Stone states in his report:1038

I understand that it was not the intention of the Plaintiff to sell this property. However it is appropriate to use the illustrative value of the property at completion as a proxy for the present value of all future cash flows which NES would have incurred/earned after the completion of the development (other than the repayment of the loan itself), risk adjusted for the time value of money and the likely risks (as estimated by the market) regarding the future cash flows likely to be enjoyed by the owner …

While Mr Stone is correct in stating that it may be appropriate to use the market

value of a property at a particular point in time as a “proxy” for the stream of

revenue—including from the ultimate sale of the land—that the property may

generate over time, this is not always so and careful consideration should be given to

the date of valuation.

353 NES submits that where the injured party intends to sell the property at or around the

date at which the value is assessed, so as to capitalise that income, or where the property

is to be held but the market yield1039 is stable, the Capitalisation of Income method

1035 Perpetual Trustee Co Ltd v Valuer General (No 2) (2007) 99 SASR 251 at 259–60 [20]–[22]. 1036 Transcript 217. 1037 Expert Report of Grant Sutherland (27 May 2015) [51]. 1038 Expert Report of Owain Stone (1 May 2015) [67] (Plaintiff’s emphasis). 1039 That is, the relationship between purchase price and rental return, which is assumed to incorporate an


may be appropriate. However, for the reasons set out below, where the injured

party intends to hold onto the property and the market yields are not stable, as is the

case here, the Capitalisation of Income method has the real potential to

undercompensate the injured party when yields are falling or overcompensate the

injured party when yields are rising by fixing the injured party with a yield that

reflects the dynamics of the market and not any inherent risk associated with the

cash flows that are intended to be valued. I turn now to the reasons which, in my

view, support this proposition.

354 The Capitalisation of Income method views an investment or income producing

property as no more than the stream of revenues that it may generate and values

those revenues based on the market price for the property at a particular point in

time. In this sense, this method uses the estimated market value of a property at a

particular point in time as a “proxy” for the value of all future cash flows generated

by the property including from its ultimate sale. Importantly, this method does not

directly seek to identify or value the cash flows that the property will generate or

identify and measure the risks associated with those cash flows being achieved.1040

Instead, the Capitalisation of Income method looks to the relationship between the

market price of comparable properties relative to their rent (the yield), which is

assumed to incorporate whatever discount that the market would apply to reflect

time value of money and investment risks at the time of purchase. The

Capitalisation of Income method then applies that same relationship between market

price and rent (yield) to the known rental return on a property to estimate the

market price for that property, being the value the market would place on the stream

of cash flows the property would generate at that point in time. As already

observed, the Capitalisation of Income method of valuation is extremely sensitive to

the yield selected such that a very small change in the yield will have a

disproportionally large effect on value.

adjustment made by purchasers explicitly or implicitly to reflect the risk of those returns being realised. Changes in yield can also reflect underlying market dynamics, such as an increase in demand for property no matter what the risk.

1040 It is for this reason that Mr Stone refers to the value of the property (its market price) as a “proxy”.


355 The difficulty with the Capitalisation of Income approach, in this case, is that the

yield that an investment property is capable of commanding in the market is a

reflection of the market’s perception of investment risk of the property relative to its

income stream as well as other dynamics of the market at a particular point in time

when a property is sold. Features of a property such as its location, specifications,

age, tenants, rent and outgoings, as well as the dynamics of the market and investor

sentiment, will all influence the market value of a property to an investor and

therefore the applicable yield.1041 By dividing the expected rental return by a yield

based on comparative sales at the date of completion of the development, as a proxy

for the value of all future cash flows and residual equity that would be earned by

NES, the Capitalisation of Income method implicitly discounts those future cash

flows, including the equity that would have been available at the end of the Lease,

on the basis of the dynamics of the property market, including the sentiments of

purchasers of comparative properties, as at the date of completion.

356 As stated in the preceding reasons, the evidence is that the Strathdale site would not

have been sold on completion of the development. Accordingly, it is not, in my

view, appropriate to fix the loss and damage intended to compensate NES by

reference to an implicit discount based on market dynamics and sentiment at a time

when the property would not have been sold, or the income capitalised. Instead, the

Court should, in my view, look to value the actual cash flows NES would have

achieved, having regard to when these would have been achieved and the risks of

those cash flows not being achieved. Where it is necessary or desirable to apply a

yield, for example to determine the market value of the land at the end of the Lease,

the yield that should be applied is the yield that best reflects the market dynamics

and sentiment at that time, being the time at which the property may otherwise have

been sold. In this case, the yields of Mr Sutherland, which are the most up-to-date

yields available, should be applied.

357 Moreover, to fix NES’s loss and damage by reference to a yield as at the date of

1041 Kemi Nominees Pty Ltd v Department of Transport (1996-1997) 16 QLCR 607 at 623.


completion, while simple and expedient as a means of valuation, is inappropriate

and unrealistic in the circumstances. The effect of capitalising NES’s expected

income at the date of completion, by reference to the yield that prevailed at that date,

when this date has no relation to the date on which the property might have been

sold, and where yields are increasing, will have the effect of undervaluing the cash

flows that NES would in fact have obtained from the property. This is particularly

so for the residual (capital) value of the land which would not have been sold for

some time. In doing so, this method would put NES in a far worse position than the

position that it would have in fact been in had NES held onto the Strathdale site, and

enjoyed the full cash flows and capital at a lesser discount, as it intended.

358 The Capitalisation of Income method is also inappropriate in the present case for

other reasons, including that the rental income under the Lease was not fixed;1042

there were no comparable sales of Masters stores from which to select a yield;1043 and

the assessment of the applicable yield did not, and could not have, taken into

account the risks associated with investing in the property and underlying market

dynamics as at the likely date of sale, which date had not yet arrived.

The evidence of Ms Wright and Mr Jackson on valuation

359 Ms Wright agreed with Mr Stone’s methodology of measuring loss and damage by

comparing actual and expected cash flows.1044 Ms Wright also agreed with Mr Stone

that the “value of the completed development” should reflect the value of the lease

and anticipated cash flows under it as at a particular valuation date.1045 Ms Wright

expressed no opinion about what the valuation date should be, nor did she express

an opinion on the accuracy of Mr Stone’s calculations of the value of the completed

development.1046

360 Mr Jackson agreed that the Capitalisation of Income approach is “one of” the most

1042 But was to be increased annually based on inflation: Court Book 1047. 1043 Transcript 1245. 1044 Expert Report of Dawna Wright (13 May 2015) [2.1.2], [4.1]. 1045 Expert Report of Dawna Wright (13 May 2015) [2.1.5], [4.2]. 1046 Expert Report of Dawna Wright (13 May 2015) [4.2.3].


used and preferred methods for determining the value of property and is “an”

appropriate approach to determine the value of the Property at the time of

valuation.1047 Mr Jackson agreed that the calculation of the net present value of

income under the lease and the exit value of the property was a valid alternative to

that method.1048

361 Ms Wright calculated what the impact would be on Mr Stone’s (Capitalisation of

Income) estimate of NES’s loss if different assumptions were made about the amount

of Masters’ contribution and higher yields (of 7 per cent and 8.4 per cent).1049 For the

preceding reasons, the assumption that had Woolworths acted reasonably and in

good faith they would have paid a contribution amount of less than $2.94 million—

being the revised NES contribution amount1050—which was less than the Rider Hunt

estimate at the conclusion of the open book process,1051 can safely be rejected.

Likewise, for the reasons which follow, yields of 7 per cent, 8 per cent and 8.4 per

cent should also be rejected. It is noted that the assumed yield of 8.4 per cent is

materially higher than any yield identified by any expert in this proceeding save for

the sale of one re-branded Dahlsens store in Warragul identified in Mr Sutherland’s

report (“Bunnings Warragul”).1052 That sale is not comparative given that it had only

recently been rebranded as a Bunnings store and has different building

specifications. Accordingly, this yield can safely be rejected.

362 Ms Wright also expresses the opinion that when calculating the net present value of

a stream of cash flows (the Discounted Cash Flow method) a discount rate is

ordinarily applied to take into account both the time value of money and the risk

profile of the cash flows.1053 This much is accepted. Ms Wright also says that, by

only discounting for the time value of money, Mr Stone has not made allowances for

inflation or the risks associated with underlying cash flows. Mr Stone accepts that

1047 Expert Report of Grant Jackson (15 May 2015) [1.10]. 1048 Transcript 1251–2. 1049 Expert Report of Dawna Wright (13 May 2015) [2.1.7], [4.3]. 1050 Court Book 3345. 1051 Court Book 3293. 1052 Expert Report of Grant Sutherland (27 May 2015) [56]. 1053 Expert Report of Dawna Wright (13 May 2015) [2.2.3], [5.2].


his Discounted Cash Flow calculations did not make any allowance for risk. NES

accepts that the purpose of the discount rate used is to account for both the time

value of money and the risks to cash flow inherent in such a business.1054 A risk free

discount rate has been used merely to avoid double counting when a Sellars discount

is applied by the Court to reflect the same risks.

363 Mr Stone, in my view rightly, said in his Supplementary Report:1055

In my experience it is not uncommon for courts to start with a net present value figure which has only been discounted at the risk-free rate and to adjust that figure based on the court’s view of the inherent risks associated with those cash flows, which may be subject to separate evidence.

Ms Wright more particularly identifies the following risks that she says have not

been accounted for in the discount rate:1056

(a) Inflation;

(b) The possibility that agreement would not have been reached in relation to the

Landlord’s Works Costs or Masters’ contribution;

(c) The possibility of variations, delays, cost increases or unforeseen costs or fees

associated with construction;

(d) The possibility that Masters may not have exercised one or more of its options

to renew the Lease (including for reason that competitors may have affected

the viability of the Masters store);

(e) The possibility that NES may not have been able to exercise its options to

purchase the land comprising the Strathdale site either within time or at all;

(f) The possibility that NES would not have obtained funding for the

development;

(g) The possibility that NES would not have been able to obtain planning

1054 See Haviv Holdings Pty Ltd v Howards Storage World Pty Ltd (2009) 254 ALR 273 at 294–5 [65]–[66]. 1055 Expert Report of Owain Stone (22 May 2015) [34]. 1056 Expert Report of Dawna Wright (13 May 2015) [5.2.3]–[5.2.7].


approval for the development.

It is clear from this list of risks, being precisely the same risks that the Court must

consider when determining what Sellars discount to apply, that it was appropriate

for Mr Stone to have determined the net present value of the stream of rent and

equity on a risk-free basis. Had Mr Stone done otherwise, there would have been

duplication once the Court applied a Sellars discount to any estimate of loss and

damage. Ms Wright agreed that where discounts were applied for the same risks,

this may result in a double-counting of risk.1057

364 Finally, Ms Wright’s evidence is that the net equity calculation by Mr Stone (being

his estimate of the exit value of the property at the end of the Lease) is flawed

because by valuing the equity by reference to the rental income in the last year of the

lease, it assumes an ongoing rental income even though no lease agreement would

exist.1058 In essence, Ms Wright says the Capitalisation of Income method is not

appropriate where the rent is not known.

365 Mr Jackson also gives evidence that in his opinion the value of the Strathdale site at

the end of the Lease should be assessed on the basis that there is no lease in place

and that it is potentially a vacant site.1059 Mr Jackson says it would be reasonable to

assume that at the end of the Lease the warehouse would have reached the end of its

economic life and would need upgrading, refurbishing or demolition. If the

property was to be upgraded, a considerable allowance would need to be made for

capital expenditure. NES contends to the contrary and, in my view correctly, that

while the rental figure used by Mr Stone to determine the exit value of the property

is the amount that would have been payable for the last year of the Lease, which by

definition would have been terminated as at that point, the rental amount is

nevertheless the best estimate of what the market rent is likely to be at that time.

This is particularly so where the rent under the Lease is fixed at the lesser of CPI or

4 per cent which does not even preserve the real value of the current market rent. It

1057 Transcript 1394. 1058 Expert Report of Dawna Wright (13 May 2015) [2.2.4], [5.3]. 1059 Expert Report of Grant Jackson (15 May 2015) [35].


is appropriate for Mr Stone to have calculated the exit value in the way that he did

and his estimate should be accepted.

366 Moreover, Mr Jackson’s concerns about the need for capital expenditure to upgrade

the site in order for it to be rented are misconceived in that they fail to take into

account that more than $2.3 million of “additional costs” of maintaining the property

have already been built into Mr Stone’s Discounted Cash Flow calculations.1060

Ms Wright conceded in cross examination that it was likely the Lease required the

landlord to maintain the premises in good order.1061 When cross-examined on the

basis of his conclusion that the appreciation of the underlying land value of the

Strathdale site coupled with the depreciation of the building would likely mean that

the highest and best use of the property at the end of the Lease would be as vacant

land for redevelopment purposes, Mr Jackson was not able to estimate the rate at

which the underlying land might appreciate.1062 Mr Jackson admitted that he had

not considered that point.1063 Mr Jackson was also unable to estimate what the

appreciation of the land might be from his own experience. Having not considered

the appreciation of the land or the obligation to maintain the premises, it is difficult

to see how Mr Jackson can have drawn the conclusions that he did that the best use

of the land at the end of the Lease would be for redevelopment.

367 I do, however, accept, as a general proposition, when considering the exit value of

the Bendigo site, the conclusion of Mr Jackson that, in addition to the net income

NES would have earned under the Lease, there would likely have been “some

considerable appreciation in land value” over the term of the Lease which NES

would have been entitled to the benefit of at the conclusion of the Lease.1064

Mr Stone’s estimate of the end value of the property at the conclusion of the Lease of

$19,824,000 million1065 compared with $52,082,527 million at the date of

1060 Expert Report of Owain Stone (1 May 2015) Appendix C. 1061 Transcript 1396. 1062 Expert Report of Grant Jackson (15 May 2015) [40]; Transcript 1253–4. 1063 Transcript 1253–4. 1064 Expert Report of Grant Jackson (15 May 2015) [39]. 1065 Court Book 5983.


completion1066 is approximately 2.5 per cent (compound) increase in the value of the

land each year. I accept that, as a matter of common experience, such an assumption

is conservative and far from unrealistic.

368 In the result, there is nothing in the reports of Ms Wright or Mr Jackson that should

dissuade the Court from accepting Mr Stone’s estimate of NES’s loss and damage,

based on Mr Sutherland’s yield, being approximately $14.5 million before the

application of a Sellars discount to reflect the risks of the opportunity not being

realised.

The appropriate yield

369 As discussed previously, where the Capitalisation of Income method is to be used to

calculate the value of a lost opportunity, the choice of yield applied can be critical.

370 The evidence of Mr Sutherland was that the appropriate capitalisation rate (or yield)

as at the date of his report (being 27 May 2015) was in the range of 6.5 per cent to

6.75 per cent.1067 In contrast, Mr Jackson concludes that the applicable yield as at

1 July 2011 would be 8 per cent.1068

371 In my view, the yield selected by Mr Sutherland should be accepted and the yield

chosen by Mr Jackson should be rejected for a number of reasons; matters to which

I now turn.

What date should be used when determining the applicable yield?

372 Where market yields are decreasing (or increasing) over time and the Capitalisation

of Income method is highly sensitive to the choice of yield, careful consideration

must be given to the date at which the yield is selected. As discussed previously, an

injured party who has suffered damage as a result of a breach of contract is entitled

to such a sum as will put him in the position he would actually have been in but for

the breach of contract. It is this governing principle and not any temporal rule that

1066 Court Book 5986. 1067 Expert Report of Grant Sutherland (27 May 2015) [59]. 1068 Expert Report of Grant Jackson (15 May 2015) [21].


determines what is to be taken into consideration in assessing loss and damage and

what is not. An application of this principle requires “an appreciation of the

plaintiff’s actual position in comparison with the position he would have been in but

for the [breach of contract]”.1069 It is for this reason that the general rule is that

damages for torts and breach of contract are assessed as at the date of breach or

when the cause of action arises1070 is not absolute1071 or universal and must “give

way in particular cases to solutions best adapted to giving an injured plaintiff the

amount in damages which will most fairly compensate him for the wrong he has

suffered.”1072

373 Where there is some good reason that the usual measure of loss and damage

assessed as at the date of breach is inapposite then:1073

the court is entitled simply to assess the loss flowing directly from the transaction without any reference to the date of transaction or indeed any particular date. Such a course will be appropriate whenever the overriding compensatory rule requires it.

The Court’s power to depart from the general rule whenever it is necessary to do so

in the interests of justice applies equally in both contract and tort cases.1074

374 One category of cases in which it is common for loss and damage to be assessed at a

later date than the date of breach is where to assess the damage at the date of breach

would leave the injured party exposed to deleterious effects (such as inflation or

foreign exchange risk). In such cases, the selection of a later date is intended to

reduce the burden (for example of inflation) on the victim and prevent any windfall

to the wrongdoer. There are other cases including where damages are awarded in

lieu of specific performance.1075 There are various reasons that loss may be assessed

1069 Johnson v Perez (1988) 166 CLR 351 at 371. 1070 Johnson v Perez (1988) 166 CLR 351 at 355. 1071 Johnson v Agnew [1980] 1 AC 367 at 401–2. 1072 Johnson v Perez (1988) 166 CLR 351 at 355–6 (citations omitted). 1073 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 667 quoting Smith New

Court Securities Ltd v Citibank NA [1997] AC 254 at 284. See also Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [274].

1074 Johnson v Perez (1988) 166 CLR 351 at 356. 1075 See, eg, Johnson v Perez (1988) 166 CLR 351 at 386–8.


at a later point in time, where it is necessary to properly compensate a plaintiff.1076

These reasons include that the assessment of loss at a later point may enable the

Court to take into account evidence relevant to the assessment of loss that has

materialised since the date of the breach and facts that would have been mere

speculation as at the date of breach.1077 It may also be desirable to assess damages at

the date of trial where compensation is for losses into the future and there is no

compelling reason to select one point in time rather than another along the

continuum over which the damages extend.1078 A compelling reason for selecting a

particular time along a continuum of loss and damage is often the point at which the

plaintiff is able to mitigate its losses. Where there is a contract to purchase a good

and there is a ready market for that good the usual point will be the point of

breach.1079

375 In the present case, the opportunity for NES to develop and lease the Strathdale site

to Masters was a unique opportunity. The evidence was that NES had acquired

options to purchase the site1080 and the development was to be fully funded from

borrowings.1081 There was no evidence to suggest that NES could or should have

minimised its loss by purchasing or exploiting some other opportunity. To the

contrary, NES explored alternative uses for the site but was unable to find any.1082

Having explored all other alternatives, NES ultimately let the options to purchase

the land expire so as to avoid incurring ongoing option fees.1083 In the

circumstances, there is no point of time at which it can properly be said that NES

could have or should have mitigated its losses nor is there any particular point at

which NES’s ongoing losses (being the ongoing loss of rent and capital appreciation

over the life of the lease) should be fixed having regard to notions of fairness to the

Defendants as the parties at fault.1084 Where the market conditions for the sale of

1076 See, eg, Johnson v Perez (1988) 166 CLR 351 at 386–8. 1077 Johnson v Perez (1988) 166 CLR 351 at 388. 1078 Johnson v Perez (1988) 166 CLR 351 at 388. 1079 Johnson v Perez (1988) 166 CLR 351 at 388–9. 1080 Outline of Brendan Edward Blake (6 March 2015) [35]–[46]; Court Book 785–833. 1081 Outline of Brendan Edward Blake (6 March 2015) [430]. 1082 Outline of Brendan Edward Blake (6 March 2015) [241]–[246]. 1083 Outline of Brendan Edward Blake (6 March 2015) [240]. 1084 Johnson v Perez (1988) 166 CLR 351 at 357–8.


land were improving over time (yields were decreasing) there is no principled

reason that NES should be fixed with the value of the Strathdale site at the

completion of the development when it in fact had no intention of selling the

development at that time. There is no dispute between the parties that any damages

payable to NES must be discounted to the date of breach. The disagreement relates

to the date on which the property should be valued. NES does not accept that this

should be at the date of completion of the development. The choice of the date of

valuation, as distinct from the date of assessment of loss and damage, determines the

choice of comparative properties and applicable yields (which reflect the sentiment

of purchasers in the market at a particular point in time). As even a small change in

yield can have a disproportionate effect on value, the choice of valuation date can be,

and in this case is, critical.1085 Woolworths submit that the value should be assessed

as at the date the development would have been completed. NES submits that the

value should be assessed as at the earlier of the date when the property would have

been sold or otherwise the date of the proceeding.

376 NES submits that, in fixing the valuation date, the Court should take into account (as

set out above) that NES intended to lease the Strathdale site to Masters for between

12 and 42 years and did not intend to sell the site at the completion of the

development. NES says that in these circumstances fixing its loss based on sales and

yields set by the market as at the date of the completion of the development, when it

had no intention of selling, would be unjust and contrary to the overriding

compensatory rule.1086 NES also submits that the choice of the later date for

valuation enables the Court to take into account, for comparison purposes, the sales

of Masters’ stores which NES submits are “truly comparable”1087 to the Strathdale

site rather than the Bunnings store sales available at the earlier date. NES submits

that yields as at the date of the proceeding also take into account the increased

supply of stores in the market arising from the Masters rollout, whereas the

1085 See the example in Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen &

Unwin, 4th ed, 2003) 373 in which a 1 per cent change in yield resulted in a $86 million or 21 per cent difference in value.

1086 See Johnson v Agnew [1980] 1 AC 367 at 401. 1087 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 373.


comparative sales at the date chosen by Woolworths does not.

377 For the preceding reasons and on the basis of the material to which reference is

made, I accept the submissions of NES that it is open to the Court to find, and the

Court should find on the basis of the evidence of Mr Sutherland, that the appropriate

date on which to capitalise the net income NES would have earned, for the purposes

of fixing loss and damage, is at the date of judgment. As such, the most recent yield

estimate, being that of Mr Sutherland, should be applied. The application of this

yield, and Mr Stone’s Discounted Cash Flow methodology, results in the loss and

damage estimate of approximately $14.5 million before a discount is applied for risk.

The yield selected by Mr Jackson

378 Even if, contrary to the position I have found, the loss suffered by NES is calculated

by reference to yields that applied as at 1 July 2011 (as Woolworths contend) the

yield of 8 per cent selected by Mr Jackson should not be accepted as it is not

supported by adequate comparable sales at that date.

379 The use of sales of comparative properties to infer value is well accepted but it is not

without its difficulties. In Redeam Pty Ltd v South Australian Land Commission,

Jacobs J said:1088

It is unnecessary for me to say very much about the use and evidentiary value of comparable sales. The method of determining market value by comparison with sales of similar land is widely accepted. The advantages and pitfalls of the method are expounded in many texts and cases. As Lord Wilberforce pointed out in Aik Hoe & Co Ltd v Superintendent of Lands and Surveys:1089

In the search for evidence to show the market price of a given property on a given date, there may be a continuous spectrum of cases varying from contemporaneous sales of precisely similar properties (unlikely to be found in many cases) to sales at different dates of properties differing greatly in nature and development.

The greater the difference between the two properties, the less reliable is the evidence of the sale of the allegedly comparable property. But that does not mean that the evidence is totally irrelevant, if there remain significant points of similarity. I adopt, with respect, the summary of Wells J in Crompton v

1088 (1977) 17 SASR 508 at 513–14. 1089 [1969] 1 AC 1 at 18.


Commissioner of Highways:1090

Upon reading some works on comparable sales, one might be pardoned for supposing that, within narrow limits of tolerance, sales of land similar to the subject land must fall into two rigid categories: comparable sales and non-comparable sales. Such a supposition would, in my opinion, be an over-simplification and could lead to error. It seems to me that, ideally, the valuer should, in the first instance, look at the sales of land over a wide geographical and temporal range, and from these select those that appear potentially useful as a basis for comparison. Those selected should then be carefully analysed by reference to an extensive list of characteristics of land sales the compilation and assessment of which fall clearly within the province of the experts. Whether or not one or more of those sales is, and how it or they ought, to be compared with the subject land becomes then a matter of degree, and a final decision is reached, often by those same experts drawing a series of nice distinctions. Obviously, no two sales of land will be found to be the same, or even similar in all respects. Those that bear a close similarity to the assumed sale of the subject land will be more reliable than those whose similarity is less proximate and in respect of which adjustments or allowances must be made before they can be safely introduced into the valuation process. At a particular point it will be found that, in respect of the remaining available sales, the adjustments and allowances that would need to be made are of such a magnitude that it ceases to be safe or sound to treat them as sufficiently similar to the assumed sale of the subject land, and they must thenceforward be rejected.

Where the valuation method employed involves the use of comparative sales,

adjustments must be made to ensure, as nearly as possible, the sales are “truly

comparable” and that the valuer is comparing “like with like”.1091 The extent to

which a sale can be relied upon as a comparative sale is a question of fact and

degree.1092

380 As the Strathdale site was to be one of the first Masters stores in Victoria, there were

no comparative sales of Masters stores as at 1 July 2011 from which to derive a

reliable yield.1093 As a result, in selecting a yield of 8 per cent, Mr Jackson relied

solely on sales of Bunnings stores. While there are obvious similarities between the

stores—both stores being “big box” hardware stores—there are many material

differences between Bunnings stores and Masters stores, including the cost and

1090 (1973) 5 SASR 301 at 317. 1091 Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 458–9. 1092 Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 523. 1093 Court Book 1245.


quality of construction and lease terms that are likely to have had a material impact

on the yields available.1094 No adjustment was made for these differences.

381 Indeed, the only sale of a Masters store identified by either expert valuer was the

sale of the Masters store in Williams Landing in April 2015 which attracted a yield of

6.04 per cent. This is considerably lower than any of the yields relied upon by Mr

Jackson. That no Masters stores were on the market until April 2015 also serves to

reinforce NES’s contention that it would not have sold the Strathdale site at that time

and should not be fixed with a yield from that date. It is well established that in

selecting comparative sales a valuer must not be unreasonably selective in

circumstances where a fair estimate can only be made where there is a reasonably

representative group of comparable sales.1095 Even non-comparable sales may be

helpful for checking the valuation and its underlying assumptions.1096

382 In reaching his yield of 8 per cent, Mr Jackson selects only three “comparative sales”

being sales of Bunnings stores in Caroline Springs, Craigieburn and Pakenham.

These sales are to a single purchaser, Bunnings Warehouse Property Trust. Notably,

not one of those sales achieved a yield of 8 per cent or more.1097 Mr Jackson then

identifies four other “further sales” in New South Wales and Queensland which he

says provide further evidence of the yield a purchaser would accept.1098 These sales

were also all made to Bunnings Warehouse Property Trust and were the four highest

yielding sales in any year between 2011 and 2015.1099 Other sales in Newcastle NSW,

Gaven QLD, Singleton NSW, Ulladulla NSW and Kempsey in NSW, all of which had

yields of materially less than 8 per cent were also not included. Mr Jackson does

identify a sale of a Bunnings store in Bendigo, which yield was less than 8 per cent,

but excludes that sale on the basis that inter alia the yield was “lower than all of the

other evidence set out in the tables above.”1100 Mr Jackson then speculates about the

1094 Mr Jackson admitted as much in cross-examination: Transcript 1245. 1095 Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 459. 1096 Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 460, 523. 1097 7.6 per cent, 7.6 per cent and 7.9 per cent: Expert Report of Grant Jackson (15 May 2015) [21]. 1098 Expert Report of Grant Jackson (15 May 2015) [22]. 1099 Save for the former Dahlsens store in Warragul, which can be excluded. See below [361]. 1100 Expert Report of Grant Jackson (15 May 2015) [28].


possible reasons for the lower yield, namely that he believed the store had been

“under let” at the time.1101 In cross examination, it was evident that Mr Jackson had

no first-hand knowledge of the reasons for that yield.1102 Mr Jackson also did not

take into account yields achieved in 2013 or onwards (which are materially less than

in 2011) despite this timeframe being a far more realistic assessment of when NES

was likely to in fact capitalise its cash flows by selling the site. In all likelihood, NES

would continue to hold the site had it not been for Woolworths’ wrongful

termination of the Agreement for Lease.

383 It is well established that the location of a property is the key determinant of the

value of a property1103 and is potentially significant in identifying the comparative

sales to be relied upon.1104 Sales in the local area may, with appropriate adjustments,

be more helpful than comparative sales in that they are indicative of the state of the

market for properties of a similar location.1105 In this regard, it is notable that neither

Mr Jackson nor Mr Sutherland identified a single sale in the whole of Victoria

(comparative or otherwise) that achieved a yield of 8 per cent or more (being the

yield adopted by Mr Jackson). In order for Mr Jackson to justify his selection of such

a high yield, it was necessary for him to rely as “further sales” on the four highest

yielding sales1106 that occurred in Australia between 2011 and 2015, each of which

were to a single purchaser in New South Wales and Queensland.

384 Whether it be deliberately or inadvertently, Mr Jackson appears to have made a

questionable selection of properties from which to derive his yield, which had the

effect of diminishing the value of his assessment of NES’s loss and damage.1107 The

limited sample size and nature of the sites selected for (and excluded from)

comparison by Mr Jackson, which included the four highest yielding sales nationally

and which were limited to sales to a single purchaser, calls into question the validity

1101 Expert Report of Grant Jackson (15 May 2015) [30]. 1102 Transcript 1234. 1103 Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) 368. 1104 Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 522. 1105 Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 523. 1106 Save for Bunnings Warragul, which can be excluded. See above [361]. 1107 See Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 511–12.


of the yield arrived at even if the 1 July 2011 date was selected.1108

385 In my view, there is no reasonable justification for Mr Jackson restricting

consideration to such a limited number of stores or including high yielding but not

comparable sales in New South Wales and Queensland while excluding low yielding

but more comparable sales in Victoria (such as the Masters store in Williams

Landing or the Bunnings store in Bendigo, Torquay and Hastings). By contrast, the

approach adopted by Mr Sutherland was far more comprehensive both in terms of

the number of stores and the range of yields considered and should be preferred to

that of Mr Jackson. Mr Sutherland’s comparison involved a sample of 19 of the most

directly comparable Bunnings and Masters stores with yields ranging from 6.04 per

cent to 8.55 per cent, including eight Bunnings stores from Victoria.1109 The stores

within non-capital city locations were considered to be the most comparable. It is

notable that the interstate stores upon which Mr Jackson based his analysis have

significantly higher yields than any Victorian based stores considered in the

analysis.1110 Given the more comprehensive analysis undertaken by Mr Sutherland,

including the inclusion of Victorian stores and a wider range of yields, as well as the

absence of Masters sales or comparable sales in 2011 and the fact that NES would not

have sold the site at that time all lead to the same conclusion: that the yield selected

by Mr Sutherland should be preferred to the yield selected by Mr Jackson.

Moreover, given the absence of comparable sales in 2011, Mr Sutherland’s evidence

and conclusion as to yield should be preferred.

Conclusion: value of the lost opportunity

386 For the preceding reasons, the submission by NES that the Discounted Cash Flow

method1111 used in Mr Stone’s second calculation should be preferred to the

1108 Transcript 1238. 1109 The yield of 8.55 per cent relates to the Bunnings Warragul which was not a purpose built Bunnings

store. The store was also sold 12 months later with a yield of 7.29 per cent. 1110 Mr Jackson admitted that the store comparisons outlined in Mr Sutherland’s report are, to the best of

his knowledge, accurate: Transcript 1250. 1111 See Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003)

376.


Capitalisation of Income method1112 used in Mr Stone’s first calculation and adopted

by Ms Wright is accepted. Whatever model is adopted, where cash flows are

capitalised based on comparative sales, the Court should, in my view, find that the

appropriate time for that capitalisation (and selection of the applicable yield) is as

close to the date of judgment as is reasonably practicable. In this case, the yields of

Mr Sutherland should apply. To do otherwise, in circumstances where NES is not a

developer who intended to sell the development on completion, but is an operator of

supermarkets and stores1113 who intended to hold the Bendigo site for the duration

of the Lease, would have the effect of undervaluing the actual loss suffered by NES

and depriving NES of the full benefits of the Lease and the capital appreciation that

it would have obtained had it held onto the site for the period of the Lease. In

circumstances where NES intended to hold the land and to retain the net income

under the Lease as well as the capital appreciation of the land, what the market may

have paid for the Strathdale site had it been sold (or the cash flows capitalised) at

completion of the development is immaterial.

387 In the result, I accept the submissions of NES that it is open to the Court to find, and

the Court should find that the value of the opportunity that NES has lost (before

applying an appropriate discount for risk) is at least $14.5 million.1114

Discount to reflect risks

388 The question remains what discount the Court should apply to adjust the measure of

loss and damage so as to reflect the Court's assessment of the prospects of that

opportunity had it been pursued in accordance with the principles in Sellars.1115

389 In reaching that determination, the Court will assess “the degree of probability that

an event would have occurred, or might occur” and adjust the award of damages

1112 See Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003)

371. 1113 See, eg, Court Book 1207, 2631, 2633, 4803. 1114 Being the net present value of the lost rent under the Lease (being approximately $10.7 million) plus

the net present value of the lost equity at the conclusion of the Lease (using the yield of Mr Sutherland) being approximately $3.8 million, being a total of $14.5 million.

1115 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355.


accordingly.1116

390 The same body of evidence, referred to earlier in these reasons with respect to

establishing the existence of loss, is also relevant to establishing the amount to be

recovered.1117 Having regard to the preceding reasons and the material relied upon,

I accept that:

(a) The risk of the parties not reaching agreement in relation to the Landlord’s

Works Costs or Masters’ contribution if Woolworths acted reasonably and in

good faith was very low;

(b) There was no more than the usual risk of delays associated with the

development or risks of inflation;

(c) No allowance should be made for the risk of variations or unforeseen cost

increases associated with the development (as the risk of cost increases was

borne by Vaughan Constructions who provided a fixed price contract1118 and

the risk of variations was borne by Woolworths who would have been

responsible for funding any such variations);

(d) There was a risk that Masters may not have exercised one or more of its

options to renew the Lease (over its entire term). This risk may increase

slightly with each consecutive term. However, given Woolworths’ public

commitment to Masters, the importance of Bendigo as a regional centre and

the fact that no Woolworths witness gave evidence that the Lease was

unlikely to be renewed, NES submits that the overall risk of the Lease not

being renewed was no more than moderate;

(e) Having regard to the statement of Mr Svanosio, the risk that NES may not

have been able to exercise its options to purchase the land comprising the

Strathdale site was extremely low;

1116 Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 643. 1117 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 364: “in practice it will usually be the same body

of evidence that tends to establish both the existence of a loss and the amount to be recovered.” 1118 Court Book 3001.


(f) Having regard to the evidence of Mr Stockwell and Mr McGregor the risk that

NES would not have obtained funding for the development was also low.

The Court should find that Bendigo Bank would not have turned down the

opportunity to fund such an important development in Bendigo, for a key

client, with a blue chip tenant, in circumstances where the transaction in

question served NES’s and the Bank’s interest that NES diversify its

investments; and

(g) The risk that NES would not have been able to obtain planning approval for

the development is real; however, in light of the evidence of both planning

experts, and the absence of evidence from Urbis, as well as the support of the

State Government and the results of the other applications for planning

approval made to the Minister, the Court should find that this risk was also

very unlikely to eventuate.

391 While these risks are cumulative, NES submits that the total discount should be

more than the 20 per cent applied in Fenridge Pty Ltd v Retirement Care Australia

(Preston) Pty Ltd,1119 but significantly less than the 70 per cent applied in Reading

Entertainment Australia Pty Ltd v Whitehorse Property Group Ltd.1120 On balance, I

accept that, as NES contends, a discount of 25 per cent would be appropriate.

Applying that discount to NES’s loss and damage, as set out above, the damages

amount should, in my view, be fixed at $10.875 million—being 75 per cent of $14.5

million—plus interest.

Orders

392 For the preceding reasons, there will be judgment for NES for damages in the sum of

$10.875 million plus interest.

393 I otherwise reserve the question of costs and will hear the parties further on this

issue.

1119 [2013] VSC 464. 1120 [2007] VSCA 309.


394 The parties are to bring in orders to give effect to these reasons.


CERTIFICATE

I certify that this and the two hundred and fifty-six preceding pages are a true copy of the reasons for Judgment of Croft J of the Supreme Court of Victoria delivered on 28 January 2016.

DATED this twenty-eighth day of January 2016.

Associate

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