A racy opening to the latest judgment in the High Court:
On Monday 14 July 1997, Mrs Maria Bergamin arrived at an office building at 5 Bowen Crescent, Melbourne. There she found that the foyer of the building had been badly damaged. A glass and stone partition, timber panelling and stone floor tiles had been removed. She was shocked and dismayed to see what remained of the floor stone work being jack hammered. A large bin was filled with the debris of the foyer. This destruction had been carried out by a tenant, Tabcorp Holdings Ltd (“the Tenant”), the appellant in this appeal.
Why was Mrs Bergamin shocked and dismayed? She was a director of the respondent, Bowen Investments Pty Ltd (“the Landlord”), a company which owned the building. She had taken particular care over and interest in the construction of the foyer. It was of high quality. It was made of special materials – San Francisco Green granite, Canberra York Grey granite, and sequence-matched crown-cut American cherry. The construction of the foyer had been completed less than six months earlier. The Tenant had taken possession under a lease granted by the Landlord less than six months earlier. The lease contained a covenant, cl 2.13, forbidding the Tenant to alter the premises without the prior written approval of the Landlord. Mrs Bergamin had on Thursday 10 July 1997 arranged for the Tenant to be told that the Landlord did not consent to any alteration to the foyer. Mrs Bergamin had informed the Tenant in writing on Friday 11 July 1997 that the Landlord could not consent until the Tenant’s proposed alterations were examined at a site meeting at 11am on Monday 14 July 1997. It was when Mrs Bergamin arrived at 10.45am on 14 July 1997 in order to attend that site meeting that she observed the destruction which had taken place and which was continuing to take place. The trial judge specifically found that the Tenant was well aware that written consent from the Landlord to do what the Tenant had done was needed, and that that consent did not exist.
OK, the second paragraph gets bogged down a bit in the detail, but it’s still pretty punchy. It’s a unanimous joint judgment, so we can only guess who is the latter-day Denning (Lord, not Ray, the famous prison escapee).
The tenant took the view that it could do what it liked and if it had demolished the foyer without consent it only had to pay the difference in the value of the property at the end of the lease.
Mrs Bergamin must have been furious, and she and her husband stuck to their guns. They wanted the money it would cost to reinstate the foyer to its original condition. As a colleague once said to me, “I love it when a client says to me ‘It’s the principle.’”
The trial judge agreed with the tenant’s approach, and awarded the landlord a paltry $38,000 in damages. This was the cost of restoring the premises to its original lettable area (there was, oddly, an award of $1,000 as “nominal damages”). Other than that, he held that the unauthorised works did not make any difference to the value of the property.
The Full Federal Court awarded the landlord reinstatement costs of $1.38 million.
The High Court rejected the tenant’s appeal. From their Olympian vantage point (gods not games), it all seems pretty simple. The so-called “doctrine of efficient breach” was decisively rejected. Nor was it necessary for the landlord actually to intend to do the rectification work in order to receive such damages – it was sufficient if the rectification was “necessary and reasonable” to put the landlord in the position it would have been if the lease conditions had been observed.
The judgment is destined to enter the contracts textbooks and probably casebooks, at least in Australia. For litigators and old hands there are a number of other twists and turns between the trial and the final appeal which which will probably be passed over in contracts courses and which are too complex to go into here.
Tabcorp is still in occupation under a subsequent lease which expressly preserved the landlord’s rights under the original lease, so it is too early to tell whether the landlord will or will not actually carry out the rectification. Students of the future may well be curious to know. Personally, I’d savour the decision more if the Bergamins simply kept the money, as they are entitled to do. The principle is good, but the money is even better!
It is worth noting that in NSW and other states which have adopted a 1927 English statutory reform of the common law, the damages would probably have been as the trial judge awarded.