Link Investments Pty Ltd v Zaraba Pty Ltd [2001] NSWCA 14 (14 February 2001)

Last Updated: 16 March 2001

NEW SOUTH WALES COURT OF APPEAL

CITATION: LINK INVESTMENTS PTY LTD v ZARABA PTY LTD [2001] NSWCA 14

FILE NUMBER(S):

40659/99

HEARING DATE(S): 14 February 2001

JUDGMENT DATE: 14/02/2001

PARTIES:

LINK INVESTMENTS PTY LTD v ZARABA PTY LTD

JUDGMENT OF: Mason P Sheller JA Rolfe AJA

LOWER COURT JURISDICTION: District Court

LOWER COURT FILE NUMBER(S): DC 2208/96

LOWER COURT JUDICIAL OFFICER: Phegan DCJ

COUNSEL:

Appellant: L S Einstein

First Respondent: J P A Durak

Second Respondent: Submitting appearance

SOLICITORS:

Appellant: Blake Dawson Waldron

First Respondent: Freehill Hollingdale & Page

Second Respondent: Gibsons Lawyers

CATCHWORDS:

Contract - construction - indemnity against "claim" for commission by agent - in circumstances reference is to a good claim - costs of defending an unsuccessful claim not included. ND

LEGISLATION CITED:

DECISION:

Appeal upheld.

JUDGMENT:

THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40659/99

DC 2208/96

MASON P

SHELLER JA

ROLFE AJA

Wednesday 14 February 2001

LINK INVESTMENTS PTY LIMITED v ZARABA PTY LIMITED & ANOR

JUDGMENT

1    MASON P: The first respondent Zaraba Pty Ltd, a subsidiary of Freedom Furniture Ltd, owned land at Pymble suitable for redevelopment. Several ventures and options were explored after June 1992. Eventually Zaraba sold the land.

2    Mr Edward Winchester is an estate agent who played various roles, some of them on his own initiative. The extent to which he was an agent for others, identification of his principal or principals, and whether he was the effective cause of the sale which eventuated were central issues in the proceedings in the District Court which have led to this appeal. Mr Winchester was joined as the second respondent to the appeal (unnecessarily in my view), but (in light of the limited issues) he has appropriately adopted a submitting stance.

3    On 8 August 1994 Zaraba contracted to sell the land to the appellant Link Investments Pty Ltd. The sale was completed in January 1995 with the appellant substituting a nominee, Everton Mews Pty Ltd as the purchaser and transferee.

4    Mr Winchester thereupon sued Zaraba for commission, relying on an agency agreement said to be made in writing and orally on about 15 June 1993. In its Defence, Zaraba denied having entered into an agreement as alleged. It also denied that Mr Winchester was the effective cause of the sale and it invoked a statutory defence based on lack of due formalities in the alleged agreement.

5    Zaraba also filed a Third Party Notice against Link Investments seeking indemnity from any liability to Mr Winchester. Zaraba relied upon a special condition of the contract of sale dated 8 August 1994 which was in the following terms:

3.1 Purchaser's Agent

(a) The purchaser warrants that it was not introduced to the property or the vendor by any real estate agent other than the purchaser's agent in circumstances which could give rise to a claim against the vendor for commission or expenses in respect of the sale of the property.

(b) The purchaser indemnifies the vendor against any claim referred to in Special Condition 3.1(a).

6    There was also a Cross Claim by Link Investments against Zaraba. It was a defensive pleading, based on allegations of misleading and deceptive conduct by Zaraba if it turned out that the plaintiff was entitled to commission.

7    The plaintiff failed in his claim for commission against Zaraba. The learned trial judge (Phegan DCJ) was uncertain whether there was a binding agreement between the parties that would have entitled the plaintiff to commission on the sale from Zaraba to Link Investments, but he found it unnecessary to reach a concluded view on that matter. He rejected the claim for commission on the basis of s42AA of the Property, Stock and Business Agents Act 1941 (the Act). That section deprives a licensee of entitlement to commission if the agreement relied upon is not in writing and signed and does not contain prescribed terms. Regulation 72 of the Property, Stock and Business Agents Regulation 1941 prescribes terms specifying the period for which the agency is to be in force. The alleged agency agreement was found to lack this necessary particular. There was also non-compliance with the statutory requirement that a copy of the agreement be served on the party to be bound within a specified time (see s42AA (1) (c)).

8    In his reasons, the judge gave a second ground for rejecting the plaintiff's claim, namely that his actions had not been the effective cause of the sale. His Honour observed that the problem for the plaintiff was that, even if his intervention brought the negotiation to a head, it neither "introduced" the purchaser nor negotiated the contract ultimately entered into between vendor and purchaser (Red 53R, 55S). The reference to "introduced" is a reference to a clause of an Agency Document that formed part of the alleged contractual arrangements and which stated:

The Agent shall be entitled the amount of commission specified in clause 3 if during the Continuing Agency Period they effectively introduce a purchaser who subsequently enter into a binding contract. (Red 47N)

9    Accordingly, there was judgment for the defendant Zaraba on the plaintiff's claim.

10    In the third party proceedings there was judgment for the defendant (Zaraba) against the third party (Link Investments) and an order that the defendant recover from the third party its costs of defending the plaintiff's claim, to be assessed on an indemnity basis. This order was not a favourable exercise of some judicial discretion as to costs (cf District Court Rules, Pt 21 r8). Rather, it was based upon a legal entitlement found to stem from special condition 3.1 set out above. It is this order that is challenged in this appeal.

11    The judge's reasoning was as follows:

This leads to the argument put by Mr Durack that the effect of Special Condition 3.1 goes beyond the right to an indemnity of any commission successfully recovered by the plaintiff. It was his submission that the indemnity extended to the defendant's costs in defending the proceedings whether or not the plaintiff was successful. Under Special Condition 3.1(b) the purchaser indemnifies the vendor against "any claim referred to in Special Condition 3.1(a)," that is "a claim against the vendor for commission or expenses in respect of the sale of the property". A literal application of the words of Special Condition 3.1 supports the defendant's case. There is no doubt that the plaintiff's claim is one against the vendor for commission in respect of the sale of the Property. The indemnity is stated in unqualified terms and is not limited to either a particular outcome (success or failure) or to any particular aspect of the claim, for example, the amount of commission as distinct from legal costs incurred in defending the claim.

Mr Einstein, on behalf of the third party, submitted that the words "circumstances which could give rise to" in Special Condition 3.1(a) are an inseparable part of the reference to "any claim" in 3.1(b). If those additional words are taken into account, as Mr Einstein submits they must, they are incapable of definition because of the indeterminacy of the word "could". The difficulty with this line of argument is that the words "circumstances which could give rise to" are better understood as defining the context of the warranty in 3.1(a) of which they are part rather than the scope of the indemnity in 3.1(b) of which they are not part. Mr Einstein relied also on an argument based on commercial sense. In effect, he submitted that to construe Special Condition 3.1(b) as contended by the defendant would be commercial nonsense.

Mr Durack submitted in reply that it is not commercial nonsense to seek a comprehensive indemnity of the kind which the defendant claims to be entitled to where there is a real possibility, as the evidence of both Klevansky and the plaintiff would suggest in this case and as no doubt the defendant apprehended, that a claim for commission would be made by the agent against the vendor. Link, a sophisticated player in real estate development, was well placed to protect itself against unwelcome commitments by refusing to sign the contract if it wished the words of Special Condition 3.1 to be qualified. Mr Durack suggested Link may well have made a commercial judgment that it preferred to accept the risk of having to bear the cost of the indemnity rather than lose the opportunity to purchase the property. Alternatively, and perhaps more likely, it may have signed the contract without giving adequate attention to the implication of 3.1(b). Either way, Link cannot now seek to escape the clear meaning of the special condition on grounds of commercial sense or convenience.

I am satisfied that Special Condition 3.1 does impose an obligation on the purchaser to indemnify the vendor for any cost caused to the vendor as a consequence of the plaintiff's claim against the vendor for commission. This includes legal costs payable by the defendant in these proceedings in the plaintiff's claim against the defendant on an indemnity basis.

12    The conclusion that the plaintiff was not Zaraba's agent on the sale removed entirely any need to consider Link's cross claim. It was dismissed with costs.

13    The appellant's primary submission is that, since the plaintiff failed to establish an entitlement to commission, there was nothing to activate the indemnity in cl 3.1(b). In the appellant's submission, the indemnity is to be read by reference to the warranty in cl 3.1(a), and with the consequence that "claim" means "circumstances which could give rise to a claim against the vendor for commission or expenses". The purchaser gave neither warranty nor indemnity against an unsoundly-based claim as the plaintiff's claim turned out to be. (I refer to this as the "substantive point".)

14    The appellant further submits that the claim against which the first respondent sought indemnity in the amended third party notice was, and was only, the claim for a liquidated amount of commission propounded by the plaintiff in his statement of claim. That claim failed. (I refer to this as the "procedural point".)

15    It is necessary to deal only with the substantive point. In my view the appellant's submission should be accepted.

16    The first respondent effectively adopts the reasoning of Phegan DCJ, relying upon what it submits is a strictly literal interpretation of clause 3. It is submitted that the appellant's interpretation effectively puts words into the indemnity, treating it as if it read:

I will indemnify you against a claim for commission where that claim arises from circumstances which could give rise to such a claim.

17    I do not agree. Subclause (a) is to be read as if there were a comma or pause after the words "purchaser's agent". What follows explains and defines the warranty. "Could" is used to emphasise the breadth of the matters warranted not to have occurred, but without going beyond a claim for commission or expenses that is a good claim.

18    If one turns cl 3.1(a) around, in order to define the matters whose happening would constitute a breach of the warranty, they are:

- introduction to the property or the vendor;

- by an estate agent other than the purchaser's agent;

- in any possible circumstances that did in fact give rise to a claim against the vendor for commission or expenses in respect of the sale of the property.

19    The claim thus posited means a good claim. If it were otherwise, as suggested by the first respondent, the indemnity would be engaged in relation to the claim (ie the sum claimed) no matter how far-fetched or extortionate the claim and (in addition to the sum claimed) to the full extent of the expenses incurred in defending it. Such an unreasonable outcome is not driven by the wording used.

20    Contrary to the first respondent's submission, the appellant's interpretation gives plenty of work for the warranty and indemnity. It ensures that the vendor will be held free by the purchaser with respect to any successful claim howsoever arising, for commission or expenses pertaining to sale by an agent. To be held free of this risk through the combined warranty and indemnity was a significant bargained-for right.

21    It is true that this result means that the indemnity covers much the same ground as the warranty to which it appurtenant. But this consequence is clearly signalled by cl 3.1(b). Indeed, it is the intended operation of the clause, read as a whole. The indemnity is the primary liability that perfects the rather inchoate warranty in cl 3.1(a). The warranty is somewhat inchoate because it is expressed as a warranty as to the non-existence of stated facts. It is not expressed in promissory terms. It is cl 3.1(b) that gives the warranty its teeth, doing so in a manner that removes the capacity to debate nice points about the computation of damages stemming from the warranty standing alone.

22    There is a further, more literal, problem with the first respondent's interpretation. The indemnity is "against any claim", an expression that does not naturally extend to the costs of defending a claim, whether or not the claim is successfully defended. Whatever else "claim" refers to in cl 3.1(b), it is a reference to a claim "for commission or expenses". The indemnity is not expressed as one "in respect of" such a claim. For this reason alone, I respectfully disagree with the trial judge's construction of the indemnity as embracing the costs of defending a successful or unsuccessful claim.

23    Well out of time and without leave, the first respondent has filed a curious notice of contention. It argues that the judgment below in the third party proceedings should be affirmed on an additional ground. The ground is that the plaintiff's claim for commission was a bona fide and arguable one having regard to the steps taken by the plaintiff in promoting the sale; the evidence of Mr Klevansky (Link Investments' managing director) that the plaintiff had claimed to have a sole agency; the nomination of the plaintiff as the first respondent's agent in a draft contract prepared by the appellant's solicitor (never apparently signed); and the existence of an Agency Document signed on behalf of the first respondent appointing the plaintiff as agent.

24    The notice of contention does not go so far as to assert that the plaintiff did in fact have a good claim for commission. Had it done so, and were it to succeed, one would expect the passive second respondent to be jumping up, embracing the result and seeking to have this Court reverse the verdict as between plaintiff and defendant that was entered at trial.

25    To describe the notice of contention as "curious" is an understatement. It was conceded that it was entirely at variance with the way the case was run at trial (with Zaraba strenuously denying the plaintiff's entitlement to commission on all fronts). It is well outside the case as pleaded and the issue joined between Zaraba and Link Investments at trial. And it seeks a finding of fact (ie that the plaintiff's claim was bona fide and arguable) that was not sought at trial.

26    The matters raised in the notice of contention do not go so far as to establish that the plaintiff had a right to commission, nor do they seek to overcome the two substantive points found against the plaintiff's claim by the trial judge. Taken at its highest the contention point does not establish that the plaintiff had a valid claim to commission. The result is that the matters asserted would, if established, still fall outside the indemnity as I have construed it.

27    The following orders should be made:

1. Appeal upheld.

2. Set aside order 2 as entered in the District Court on 13 October 1999 and in lieu thereof order that there be a verdict and judgment with costs against the defendant and in favour of the third party in the third party proceedings.

3. Appellant to pay second respondent's costs on a submitting basis.

4. First respondent to pay appellant's costs of the appeal and to have a certificate under the Suitors' Fund Act if qualified.

28    SHELLER JA: I agree.

29    ROLFE AJA: I agree.

30    MASON P: The orders will be as indicated.

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LAST UPDATED: 14/03/2001