Interpretation

SkyCity operated a loyalty program in which customers could accumulate loyalty points, convert accumulated points into electronic gaming credits and then either redeem the converted credits for cash, or use the converted credits to bet on the machines. The converted loyalty point credits were indistinguishable from credits purchased by gamers using their own funds.

A dispute arose between SkyCity and the State of South Australia about whether the converted credits, when used to bet, constituted 'net gambling revenue' and attracted duty payable by SkyCity.

The Casino Duty Agreement between SkyCity and the Treasurer of South Australia provided that SkyCity was to pay duties in respect of 'net gambling revenue' for a financial year. This term was the subject of cascading definitions in the agreement.

At first instance (City Adelaide Pty Ltd v Treasurer of South Australia [2024] SASCA 14), the South Australian Court of Appeal answered the questions referred for consideration as follows:

• Question 1: Do 'Converted Credits' when played by customers constitute 'gross gambling revenue' under cl 1.1 of the Casino Duty Agreement being an 'amount received by [SkyCity]… for or in respect of consideration for gambling'? Yes.
• Question 2: Do loyalty points received by customers for gambling using electronic gaming machines and automated table games constitute 'monetary prizes' within the definition of 'net gambling revenue' in cl 1.1 of the Casino Duty Agreement? No.
• Question 3: If the Converted Credits issue and the Monetary Prizes issue are decided in such a way that SkyCity is liable to the Treasurer of South Australia for unpaid casino duty, then, as a matter of law, do the common law or equitable principles concerning penalty clauses apply to cl 11 of the current Casino Duty Agreement? Yes.

SkyCity was granted special leave to appeal the Court of Appeal's answer to Question 1 (the appeal), and the state applied for special leave to cross-appeal the Court of Appeal's answer to Question 3 (the cross-appeal).

The appeal

SkyCity argued that the Court of Appeal erred by declining to take the ordinary meaning of 'revenue' in the defined term 'gross gambling revenue' into account in construing the phrase 'amount received ... for or in respect of consideration for gambling' in the definition of that expression. The error of principle alleged by SkyCity was that the Court of Appeal treated, as an inflexible rule, the orthodox principle that it is 'circular to construe the words of a definition by reference to the term defined'. Skycity argued that the natural meaning of 'revenue' connotes an incoming or receipt of money from an external source and the Converted Credits fell outside this definition.

The court unanimously dismissed the appeal, finding that the reasons for judgment of the Court of Appeal were sound and dispositive.

The court confirmed that there is no rule against construing words of a definition by reference to the term that those words define. The term must, however, be construed in the context of the substantive provision to which it applies in accordance with its natural and ordinary meaning. The court considered that the Court of Appeal did not adopt a rigid approach to this rule, but rather expressed well-founded scepticism as to whether the word 'revenue' was sufficient to convey the meaning preferred by SkyCity in the face of other factors. The Court of Appeal correctly identified that the monetary value received by SkyCity was 'in the form of a reduction in SkyCity's indebtedness to the customer in an amount represented by the monetary value of the electronic gaming credits which the customer could then have redeemed for cash yet then chose to wager'.

The cross-appeal

The court granted the state's application for special leave to cross-appeal, and allowed the cross-appeal.

The issue in the cross-appeal was whether the Court of Appeal was correct to conclude that the obligation of SkyCity under cl 11 of the Casino Duty Agreement to pay interest for late payment of casino duty at the rate of 20% per annum could be the subject of relief against enforcement if that obligation to pay interest could properly be characterised as a penalty at common law or in equity.

The court described the Court of Appeal's reasoning as involving three steps:

• first, by providing in s17(4) of the Casino Act that the Casino Duty Agreement operated as a deed, the South Australian Parliament indicated that the general law of contract would apply to the Casino Duty Agreement except to the extent modified by statute;
• second, a clear and unmistakeable manifestation of legislative intention needed to be found in the Casino Act in order to oust the common law and equitable jurisdiction of the Supreme Court to declare a provision of the Casino Duty Agreement unenforceable as a penalty; and
• third, that although such a clear and unmistakeable intention is manifested in the specific references in ss17(1)(c) and 51 of the Casino Act to 'penalties', it cannot be found in the references in those same provisions to 'interest'.

The court allowed the cross-appeal, finding that this reasoning inverted the scheme of the Casino Act. Specifically, the court found that:

• by providing that the Casino Duty Agreement operates as a deed, s17(4) of the Casino Act permits such an agreement to allow for the payment of casino duty, interest and penalties for late payment or non-payment, and any other clause in the Casino Duty Agreement that deals with a matter within s17(1)(a), (b) or (c) of the Casino Act to be enforced at common law or in equity, where it otherwise may be unenforceable;
• s17(1)(c) of the Casino Act sets out that the Casino Duty Agreement must '[deal] with interest and penalties to be paid for late payment or non-payment of casino duty'. This section distinguishes between interest and penalties in a way that allows for the Casino Duty Agreement to impose an obligation to pay interest for late payment or non-payment of casino duty without also imposing an obligation to pay penalties for late payment or non-payment of casino duty, which was effected in cl 11 of the Casino Duty Agreement; and
• the distinction between 'interest' and 'penalties' in s 17(1)(c) of the Casino Act provides no basis for limiting the rate of interest able to be agreed between the licensee and the Treasurer to a rate that cannot be characterised as penal.  

This dispute related to the sale of land in Ultimo. The appellant, J&Z Holding, was the prospective purchaser and the respondent, Vitti, was the registered proprietor.

The parties entered into a Put and Call Option Agreement under which Vitti granted J&Z Holding a call option for a period of 22 months, expiring on 17 June 2020. The Agreement required J&Z Holding to pay a Call Option Fee equivalent to 20% of the purchase price of the property in four equal instalments across the call option period.

On 17 June 2020, an Amending Deed was executed, which extended the call option period. The Deed was conditional on payment of the Call Option Fee, and stated that the Call Option Fee 'is and has been irrevocably and unconditionally forfeited and released to [Vitti]'.

The call option was not exercised by J&Z Holding. Vitti exercised the put option, thereby creating a contract for the sale and purchase of the property, and issued a Notice to Complete. J&Z Holding failed to complete the contract and Vitti subsequently purported to terminate the contract.

J&Z Holding alleged that Vitti's purported termination of the contract constituted a repudiation, and purported to terminate the contract. J&Z Holding claimed that the option fee could be characterised as a conventional deposit, and that because of Vitt's alleged repudiatory conduct, J&Z Holding was entitled to recover that sum.

Justice Griffiths (Justices Payne and Kirk agreeing) dismissed the appeal.

The key issues on appeal were:

• Whether, upon a proper construction of the contract read with the Option Agreement and Amending Deed, the disputed sum was to be characterised as a deposit (ie an amount paid by J&Z Holding as security that it would perform the contract) or, alternatively, as an option fee that became the property of Vitti and was credited against the purchase price.
• If the disputed sum was a deposit, whether J&Z Holding was entitled to recover it in a restitution claim arising from the alleged termination of the contract or from the law governing penalties and relief against forfeiture.

Justice Griffiths acknowledged that the agreements at issue were 'badly worded' and contained 'numerous errors'. His Honour considered that such poor drafting can play a significant role in the construction exercise, noting Justice Leeming's judgment in S&C Nicola Pty Ltd v Peter Holmes Investment Pty Ltd (2022) 108 NSWLR 165 (which was covered in our 2022 Contract Law Update). In S&C Nicola, Justice Leeming observed that numerous errors or 'casual' grammar and syntax in a contract can diminish the weight placed on considerations that turn on the precise form of clauses. His Honour suggested that imprecise drafting can invite a threshold question about what the literal or grammatical meaning of the words used in a contract actually is.

The court held that the true legal character of the disputed sum was an option fee (not a deposit). On a proper construction of the contract for the sale and purchase of land (which must be read in the context of the Option Agreement and Amending Deed), the disputed sum would remain the property of Vitti regardless of whether the Call Option was exercised and in circumstances where the Put Option was exercised.

In reaching this conclusion, Justice Griffiths was critical of the 'looseness in language' of the contract. His Honour considered that the expression 'released to the vendor' did not mean that the disputed sum was not the property of the vendors. Further, the Option Agreement expressed that the vendors had a right to 'keep' the amounts paid as the Call Option Fee, which strongly indicated that the disputed sum was paid in consideration for the grant of the Option Agreement, rather than as a deposit. The Amending Deed, which expressed that the Call Option Fee would be 'irrevocably and unconditionally forfeited and released to the [vendors]', reinforced this construction.

On 3 October 2018, AMA entered into a Business Sale Agreement (the BSA) to purchase two auto repair businesses from the appellants. Clause 5.1 of the BSA provided a formula for calculating the deferred consideration (the Earn-Out) to be paid by AMA to the appellants within 90 days of the second anniversary of completion.

A dispute arose in November 2020 regarding the calculation of the Earn-Out: specifically, whether it should be based on Earnings Before Interest and Tax (EBIT) over two calendar years, as expressly stated in cl 5.1 of the BSA; or the 'average annual' EBIT for the Earn-Out Period, as the respondents contended.

The appellants commenced proceedings in the Supreme Court of New South Wales and sought declaratory relief for the proper construction of cl 5.1, while AMA sought rectification of cl 5.1 either as a matter of law by construction or in equity to specify that the Earn-Out should be based on the 'average annual' EBIT.

While the primary judge found against AMA on the construction of cl 5.1, her Honour ordered rectification on the basis that the clause did not reflect the common intention of the parties to the BSA.

The issues for the Court of Appeal to consider included whether the primary judge erred in failing to find that, as properly construed, cl 5.1 of the BSA provided for an Earn-Out calculation based on 'average annual' EBIT over the Earn-Out period.

The Court of Appeal unanimously allowed the appeal.

As to the first issue, the court found that the primary judge erred in ordering rectification and that there was no basis for a finding that the parties' objective intention was anything other than as reflected in the words used in the relevant clause. In reaching this conclusion, the court discussed the principles in relation to rectification by construction and rectification in equity.

Rectification by construction

The court summarised the relevant principles of contractual construction set out in Electricity Generation v Woodside Energy Ltd (2014) 251 CLR 640, including that a commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'. The court also referred to the principles in relation to rectification by construction, highlighting that:

• the starting point is that, if the error is clear, and it is also clear what a reasonable person would have understood the parties to have meant, the mistake may be corrected as a matter of construction;
• two conditions must be satisfied before the court takes such a step: the literal meaning of the contractual words is an absurdity, and it is self-evident what the objective intention was; and
• the court must be satisfied of those matters to a high level of conviction.

The court found no error in her Honour's conclusion as to construction. Taking into account the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objectives to be secured by the contract, the relevant conditions were not satisfied.

Rectification in equity

When considering the respondents' contention in relation to rectification in equity, the court reaffirmed the standard of proof set out in Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 that 'rectification will only be ordered in equity on the basis of clear and convincing proof of the parties’ common intention'.

As to the onus of proof, the court held that 'in a claim in rectification for mutual mistake, an applicant must discharge the onus of making out its claim and must do so by reference to clear and convincing proof of the parties’ common intention.'

The court rejected the respondent's contention by stating that the fact there were solicitors on both sides of the transaction was a reason for caution in making the factual findings upon which a rectification was based, as there was a 'measure of inherent unlikelihood' in each solicitor being mistaken in the same way.

Cougar Metals and the second respondent, Pyke Hill Resources, were parties to an option agreement under which Pyke Hill granted Cougar an option to acquire the rights to explore for and mine nickel and cobalt on a mining lease held by Pyke Hill. Cougar exercised that option but did not commence mining on the site.

Pursuant to cl 6(a)(ii) of the option agreement, Cougar was required to, among other things, 'attend to all proper administration in respect of the Tenement including … payment of rents and rates as they fall due, and otherwise maintain the Tenement in good standing including payment of all statutory minimum annual expenditure commitments in respect of the Tenement'.

Under the Mining Act 1970 (WA), it was a term of the mining lease that a prescribed minimum expenditure occur each year in connection with mining in order to encourage prospecting and exploration for minerals within the state. In 2019–20, Cougar did not make the statutory minimum annual expenditure for the site. It later obtained a retrospective exemption relieving it of compliance with the obligation for that year.

In July 2021, the respondents purported to terminate the option agreement for breach of cl 6(a)(ii) due to Cougar's failure to make the minimum annual payment under the Mining Act within the relevant year. The respondents commenced proceedings in the Warden's Court, seeking a declaration that the option agreement had been validly terminated. The decision of the Warden was appealed to the Supreme Court of Western Australia, where the primary judge held that the clause was an essential term and had been breached, entitling the option agreement to be terminated. Cougar appealed this decision to the Court of Appeal.

The Court of Appeal unanimously held that:

• Cougar breached cl 6(a)(ii), as the obligation on Cougar was to maintain the site in good standing by payment of statutory expenditures, and retrospective exemption from the obligation to make payment did not absolve Cougar of liability for a breach that had already occurred; however
• cl 6(a)(ii) of the option agreement was not an essential term and the respondents were not entitled to terminate the agreement as of right for breach.

When is a term an essential term?

Whether a term of a contract is an essential term, rather than an innominate or intermediate term, is a question of construction.

The court reviewed the authorities and noted that the accepted position in Australia is that:

• the determination of whether a term is essential, so that any breach will justify termination, must be assessed in light of the common intention of the parties, expressed in the language of the contract, and the commercial relationship and purpose underpinning the agreement; however
• there is a policy of 'leaning in favour' of classifying terms as intermediate (or non-essential terms) in order to promote certainty of outcome, encourage contractual performance and restrict the right to terminate to cases where breach of an agreement occasions serious prejudice.

The court also noted the decision of Lord Justice Hamblen in Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016] 2 Lloyd's Rep 447, which characterised the position in English law as being that a term is presumed to be innominate, rather than essential, unless it is clear that it is intended to be a condition or a warranty.

Why was cl 6(a)(ii) not an essential term?

Applying the Australian position, the court held that cl 6(a)(ii) was not an essential term because:

• The option agreement did not contain any provisions allowing either party to terminate the agreement for breach, nor any provision providing that a given term was 'essential'.
• Clause 6(a)(ii) included a wide variety of obligations, many of which could be readily capable of 'trivial breaches', including breaches for which the prospect of serious consequences—eg the lease being forfeited—were remote.
• The agreement as a whole required Cougar to make substantial payments for the rights to mine the site, and it could not readily be inferred that the parties' intention was that the agreement would be terminated for any, even trivial, breach of cl 6(a)(ii). Rather, a commercial interpretation of the agreement was that the parties intended it would only be terminated in the event of serious breach.
• Damages would be an adequate remedy for most consequences of a breach of cl 6(a)(ii), and such damages would likely be capable of assessment. While damages may not have been an adequate remedy in the event that the consequence of a breach of cl 6(a)(ii) was that the lease was forfeited, this does not render the term essential, and it is in the nature of innominate terms that damages will not be an adequate remedy in some cases.

The respondents' right to terminate

The final outcomes of the case were that:

• The respondents were not entitled to terminate the agreement for breach of cl 6(a)(ii) as a right.
• The respondents' case rested entirely on the characterisation of cl 6(a)(ii) as an essential term. They did not contend that, if cl 6(a)(ii) was found to be an innominate term, Cougar's breach was significantly serious to entitle termination.

On this basis, the decision of the Warden's Court was restored, and the respondents were not entitled to a declaration that the option agreement had been effectively terminated.