By Veno Panicker, Partner, Danny Arraj, Managing Partner and Nicholas Latham, Graduate Solicitor
19 February 2019
Blackstone Waterhouse is acting for a major developer in a special leave application in the High Court considering the ‘True Rule’ in Codelfa – the issue of whether there needs to be ambiguity in the wording of a contract before a Court can look to extrinsic evidence to construe the meaning of a term within an agreement. If leave is granted, the decision will provide certainty in respect of an issue which has been hotly debated for over a decade with inconsistent decisions at Court of Appeal level and the High Court.
These issues are of significant importance to developers – as well as having broad application to parties to commercial contracts.
1. Super lots have become a major source of litigation. Opportunistic owners within a ‘super lot’ seek to run every possible technical argument to try and avoid the exercise of a call option over their residential property – to try and get a high purchase price for their property – knowing the importance of their site to the developer. It is contended that such conduct is unconscionable and this forms part of the matters before the High Court as well.
2. Hills Central, part of the Toplace Group, has now sought special leave of the High Court in fighting back against such litigants and this leave application is listed for a special leave hearing on 22 March 2019. The Developer is taking on a challenge faced by numerous developers, and, if leave is granted, the decision will be a landmark case in contract law and the exercise of options.
3. It is important for developers to take a hard stand on such opportunistic claims – or risk facing more litigation of this type. Watch this space!
HISTORY OF THE LITIGATION
Round 1 to the Developer – NSW Supreme Court
Hills Central Pty Limited v Anthony Gerard Hagerty & Catherine Elizabeth Hagerty t/a the Executors of the Estate of the late Gladys Delores Hagerty  NSWSC 789
The 3 Ps have always been essential to a contract for the sale of land – parties, price and property. What happens if another criteria – such as a completion date, is omitted from a contract for sale of land under cover of an option exercise notice?
At first instance, in the Supreme Court of NSW, the Court held that the completion date was not essential to the valid exercise of the option – and could be filled in later.
Critically, the Court focussed on the option exercise notice and what was essential to the creation of a valid contract for sale. It did not give weight to a cover letter, which simply requested an extended completion date – though not making that date a condition of the exercise of the option.
The Court held that through a combination of the Plaintiff’s compliance with the Option Deed along with the ‘mere request’ expressed in the covering letter resulted in the Plaintiff validly executing the option to purchase the land.
Round 2 to the Developer – NSW Supreme Court
Subsequently, Slattery J ordered specific performance of the contract in favour of the Plaintiff.
The Owners had tried to argue that the Court did not have the power to order specific dates to give effect to the completion of the sale. This failed.
Round 3 to the Owners – NSW Court of Appeal
Hagerty v Hills Central Pty Ltd  NSWCA 200
The Owners appealed and successfully convinced the NSW Court of Appeal that the cover letter rendered the exercise of the option unclear – despite the Court also finding that absent the cover letter the omission of the completion date in the sale contracts would not have invalidated the exercise.
This finding involved:
- looking outside the option exercise documents (an exercise notice and 2 executed contracts with correct price, parties and property, a deposit cheque, exercise notice and nomination notice); and
- giving weight to a cover letter – not a contract document – to invalidate the exercise and failing to clearly reflect the intention to be bound by the terms of the option.
Round 4 – Special Leave to the High Court
Hills Central has applied for special leave to the High Court of Australia.
It is a well-established principle of contract law that ‘evidence of surrounding circumstances is admissible if the language of a contractual position is ambiguous or susceptible of more than one meaning’. This means before looking outside a contract document, the Court must first determine some ambiguity that warrants looking at surrounding circumstances. This is known as the ‘True Rule’ following a High Court decision known as Codelfa v State Rail Authority.
The Court of Appeal did not find ambiguity in the exercise notice and supporting documents but still looked at the cover letter – a document forming part of the ‘surrounding circumstances’ – in our view in breach of the ‘True Rule’.
If special leave is granted, the High Court will need to consider:
- whether the Court of Appeal was permitted to look at the cover letter in the absence of first finding ambiguity in the option deed and exercise documents; and
- if so, whether the ‘True Rule’ needs to be clarified to specify the circumstances where surrounding circumstances can be considered in construing a contract prior to a finding of ambiguity.
Special leave applications are notoriously difficult. This is because the Court considers, amongst other things, the public importance of a case and whether the law relating to the issues in dispute are settled as part of considering whether a further appeal should be allowed.
We consider the issue is of sufficient merit to have provide a serious opportunity to warrant the granting of special leave – given the issues raised have general commercial and contractual importance. The special leave hearing is listed for 22 March 2019.
We will keep you informed – an important fight for Developers as well as for contractual certainty.
 Blackstone Waterhouse acts for Hills Central.
  149 CLR 337 per Mason J at