Eastbound Estate Pty Ltd v DC Consolidated Investments Pty Ltd [2024] VSC 40

Nikki Miller | Isobel Carmody | Jack Holmes

Key takeout

The Supreme Court of Victoria has declared a contract termination under a clause that included a reference to the party’s ‘absolute discretion‘ to be invalid. 

Notwithstanding the inclusion of the words ‘absolute discretion‘, the relevant termination clause still needs to be read in accordance with the ordinary rules of contract interpretation.  This means that a clause that expresses that a right may be exercised ‘in [a party’s] absolute discretion‘ will not necessarily be truly capable of exercise in that party’s absolute discretion if the clause also includes conditions that must be met before the party can exercise that right.

A party should be prepared to demonstrate that the relevant conditions have been met in order to enliven the relevant power it is exercising.

Facts

Eastbound Estate Pty Ltd (purchaser) entered into an agreement to purchase a lot of land in Victoria from DC Consolidated Investments Pty Ltd (vendor).  The purchase was conditional upon the registration of the plan of subdivision with the relevant Council.  The Council approved the registration, subject to a list of requirements including the vendor amending the existing plans to provide for the relinquishment of title for a service road entrance and the vesting of an existing road in the Council, as well as an asset condition assessment for the road that would be vested in the Council. 

The sale contract contained the following special condition which the vendor sought to rely upon to terminate the sale contract:

[10.7] …if the responsible Authority [i.e. the Council]:

(b) imposes a Requirement that in the opinion of the Vendor (in its absolute discretion) is too onerous for the Vendor to perform;

the Vendor may terminate this Contract…

The vendor alleged that the requirements imposed by the Council were too onerous and on that basis purported to terminate the sale contract.  The purchaser disputed the termination and applied to the court for a declaration that the termination was invalid.

Decision  

The court found that the purported termination was invalid.  The court concluded that the inclusion of the words ‘in its absolute discretion‘ in the relevant clause did not permit the court to disregard the contractual context and commercial purpose in construing the relevant clause.

The court considered that the ordinary rules of contract interpretation, which include that a court should endeavour to give meaning to all the words used in a contract, required that the relevant clause be read such that the exercise of the vendor’s discretion to form the opinion required to enliven the power to terminate the sale contract was constrained in that:

• it must relate to the appropriate subject matter; and
• must be exercised within the parameters of the sale contract more broadly.  

The opinion of the vendor must relate to a condition which was too onerous for the vendor to perform, according to the vendor’s determination. 

The relevant subject matter about which the vendor’s opinion needed to be formed (i.e. that there was a condition imposed that was too onerous to perform) did not exist.  The vendor was not permitted to rely on the flow-on commercial consequences of any conditions imposed, once performed, to terminate the sale agreement – the condition relied upon itself must have been too onerous to perform in the first place.  The vendor failed to demonstrate that there was a relevant condition that it considered was too onerous to perform. 

The court rejected the vendor’s position that it did not need to give reasons or provide any evidence of the actual formation of an opinion, as this would ‘effectively render [SC10.7] a free-standing and unregulated power to terminate the contract‘. 

Accordingly, the termination power was not enlivened and the purported termination of the sale contract was invalid.