Australia: Meanings of AND and OR: wrongful termination of an agreement to lease

The Supreme Court of Victoria recently found in favour of Oxanda Childcare Pty Ltd in a case which dealt with a critical construction issue regarding a clause in an agreement to lease (Oxanda Childcare Pty Ltd v MAAG Developments Pty Ltd [2018] VSC 370). This case is a great example of how important careful drafting is so as to reflect the intended outcome of either party.

Oxanda Childcare Pty Ltd ("Oxanda Childcare") (plaintiff) sold land to MAAG Developments Pty Ltd ("MAAG Developments") (defendant) under a contract dated 11 March 2015 ("Contract for Sale") and an agreement ("AFL") that the Defendant would build a childcare centre and lease back to Oxanda Childcare.

On 7 September 2015 however, MAAG Developments terminated the AFL on the basis that it had not obtained the Council approval for their works by the Landlord's Works Approval Date (as defined in the AFL). The issue to be resolved was a matter of the proper construction of clause 2.1(e) of the AFL which entitled either party to terminate if approvals from Council enabling the lawful construction of the childcare centre had not been obtained "and" (as Oxanda Childcare contended) but "or" (as MAAG Developments contended) MAAG Developments had not completed its purchase of the land by a particular date. The clause read as follows:

"2.1(e) If:

  1. the Landlord Approvals are not obtained; and
  2. the Landlord has not settled its purchase of the Land, by the Landlord's Works Approval Date ...
  3. either party may by written notice to the other terminate this Deed ..."

Were these elements, as the precondition for enlivening the right to terminate under that clause, separate and independent elements, each capable of enlivening such right, or cumulative so that both had to be satisfied before the right was enlivened?

Oxanda Childcare contends that MAAG Developments did not have a right to terminate the AFL pursuant to clause 2.1(e) of the AFL because the Defendant had already settled its purchase of the land as part of the sale and lease back transaction therefore not satisfying one of the conditions of the clause i.e. the condition in clause 2.1(e)(ii) was false.

Principles

The principles guiding the construction of commercial contracts such as the AFL are well established. Croft J summarised the principles from two cases (Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640) and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd ((2015) 256 CLR 104)), in which the High Court stated "In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable business person would have understood those terms to mean".

MAAG Developments submits that in order to give effect to the "deal", two circumstances were necessary namely, completion of MAAG Developments purchase of the land and obtaining the approvals for the lawful construction of the building for the purpose of a childcare centre.

Oxanda Childcare submits that the plain ordinary reading of the clause, as indicated by the use of the word "if" in the opening text and the use of the word "and" connecting the two conditions or elements, is that these provisions apply and only apply if both (i) and (ii) are satisfied. Based on this, Oxanda Childcare contends that neither party has a right to terminate the AFL in accordance with clause 2.1(e)(iii) once MAAG Developments has settled its purchase of the land or the Landlord Approvals are obtained. Oxanda Childcare contends the word "and" should be given its ordinary and usual meaning as being conjunctive rather than disjunctive and submits that only if both elements are satisfied could the right to terminate be enlivened otherwise the sale and lease back could be partially undone exposing one or other with either only a land sale or only a lease with no land. Therefore the commercial purpose of the Contact of Sale and the AFL would fail to be achieved.

As previously mentioned, MAAG Developments contends that the clause contains two conditions or elements which are not cumulative i.e. if one of the two conditions or elements were not met by the Landlord's Works Approval Date, the right to terminate would be enlivened. This construction is contended for by MAAG Developments because, in the present case, in the circumstances in which the AFL was entered into simultaneously with the settlement of the Contract for Sale, the conditions of the clause could never be met. Thus it is said, contrary to the principles of construction applicable to commercial contracts, this would leave the clause with no possible operation.

The problem for MAAG Developments is that for this interpretation to work, "and" needs to be read as "or" in clause 2.1(e).

In support of MAAG Developments contention, reference is made to the Wavish case (Associated Newspapers Ltd v Wavish (1956) 96 CLR 526 (Vic)) where the High Court construed the word "and" in the context of the legislation with which it was construed as being disjunctive, rather than conjunctive. The particular section stated:

"(1) In this Part – "obscene" ... includes:

  1. tending to deprave and corrupt persons whose minds are open to immoral influences; and
  2. unduly emphasising matters of sex, crimes of violence, gross cruelty or horror."

[emphasis added]

The High Court read "and" as "or" to give the section its intended meaning.

Croft J in the present case, accepted that the decision in Wavish is one where the construction and process produced the outcome MAAG Developments was seeking, however, the High Court decision was in a particular legislative context and purpose. The High Court found that the purpose of the legislation would be negated were "and" given its ordinary conjunctive meaning. Croft J did not consider the interpretation rules followed by the High Court for legislation were applicable to the contract being considered by this case.

Oxanda Childcare also noted that their interpretation of the word "and" was consistent with the use of that word in other parts of the AFL. Croft J said, in his opinion, this was a strong indication that the parties were using the words "and" and "or" in the AFL in their ordinary and natural meaning.

MAAG Developments submitted under Oxanda Childcare's construction of the clause, a party could not terminate the AFL even in circumstances where no building could lawfully be constructed or used as a childcare centre on the land. MAAG Developments considers this construction to produce an absurd result. However, Croft J held there was no commercial absurdity in construing the clause and was of the opinion that as contended by Oxanda Childcare, MAAG Developments' construction would have the potential to permit MAAG Developments to avoid its obligations to lease back the land after failing to obtain Landlord Approvals.

Conclusion

Croft J found in favour of Oxanda Childcare. He held that MAAG Developments did not have a right to terminate the AFL on the basis of a proper construction of clause 2.1(e) because MAAG Developments had settled its purchase of the land which meant they did not satisfy the condition in clause 2.1(e)(ii) which would have allowed them to terminate the AFL. Oxanda Childcare was entitled to repudiation damages for wrongful termination and was awarded $3.5m.

For MAAG Developments' purposes, the clause should have been drafted using the word "or" rather than "and".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Paul Carroll
 
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