Ozton Pty Ltd v Cromwell Seven Hills Pty Ltd as trustee for the Cromwell Northpoint Trust demonstrates the Court’s reluctance to interfere with contractual arrangements freely entered into between commercial parties, holding that:
- A contract providing an obligation to pay "without deduction" or "without set-off" excludes all set-offs, including equitable set-offs
- Contractual clauses that encompass risk allocation between the parties should be given full effect
- Damages are an adequate remedy for breach of express covenant and derogation from grant where the costs arise out of lost rent from and potential action by subtenants.
Ozton leases five commercial premises in Northpoint Tower, North Sydney, which is owned by Cromwell Seven Hills Pty Ltd as trustee for the Cromwell Northpoint Trust (Northpoint).
At the beginning of this year, Northpoint began a major redevelopment and renovation of Northpoint Tower. Ozton claims that the large scale of these works has breached the express covenant for quiet enjoyment in its leases, and therefore constitutes a derogation from grant.
As a result, from April 2016, Ozton stopped paying rent. Northpoint denies that Ozton has a right to withhold rent and has threatened to call on guarantees given by St George Bank. Ozton is therefore seeking an interlocutory injunction to restrain Northpoint from doing this.
What Was Argued in This Case - Key Issues
The key issues were:
1. In light of the relevant provisions of each lease:
- Could Ozton claim an equitable set-off?
- Could Ozton claim equitable relief more generally?
2. Are common law damages an adequate remedy for any derogation from grant by Northpoint, and if so, is it likely that Northpoint will be able to meet any damages reasonably likely to be awarded?
What Was Decided?
Can Ozton Claim an Equitable Set-off or Equitable Relief More Generally?
The relevant contractual provisions of the leases were clauses 5.1 and 21.1.
Clause 5.1 stated, among other things, that:
“The Lessee must make payments due under this Lease:
b) without set-off, counter claim, withholding or deduction”.
Clause 21.1 stated, among other things, that:
“(d) The Lessee must not do anything which could prevent or delay payment by the bank to the Lessor under the Bank Guarantee”
The Effect of Clause 5.1
Citing Norman, His Honour noted the general trend of authorities indicating that an obligation to pay “without deduction” will not exclude a right of equitable set-off, and considered Oswal as indicating that the words “without set-off” will exclude all forms of set-off, including both equitable set-off and statutory set-off.
Considering the scheme of risk allocation that the leases evince, McDougall J held that “the better view” of clause 5.1(b) is that it operates to exclude the right to equitable set-off.
The Effect of Clause 21.1(d)
His Honour held that, except for limiting circumstances such as fraud, the contractual scheme evinces a clear intention that clause 21.1(b) be interpreted to ensure that Northpoint’s income was guaranteed, even if there were disputes. Citing, with approval, Jackson’s J statement in Telvent that:
“even if an interlocutory injunction only delays the beneficiary’s right to make the demand, that interferes with the very contractual right that was agreed if the injunction turns out to have been wrongly granted”
McDougall J concluded that, “absent evidence of real and substantial harm to Ozton that is unlikely to be recouped if Ozton succeeds”8 at trial, clause 21(d) should be given its full effect so as to protect the parties’ contractual risk allocation (ensuring Northpoint’s rental income is guaranteed).
Are Common Law Damages an Adequate Remedy for Any Derogation From Grant by Northpoint and Will Northpoint Be Able to Meet Any Award of Damages?
Accepting that the breaches that Ozton complains of are capable of being remedied by damages to compensate for loss of rent from, and further claims by, Ozton’s subtenants, McDougall J therefore held that the second part of this question, whether Northpoint will be able to meet any award of damages, is the key question to be asked.
Considering Northpoint’s net assets (totalling at least AU$56 million), along with its profitability and return of cash to investors, His Honour considered the risk of it not meeting any realistic estimate of damages suffered by Ozton to be minimal. His Honour therefore considered damages to be an adequate remedy for any damages that Ozton might sustain.
Justice McDougall therefore held that “there is no good reason for the court to interfere with Northpoint’s exercise of…its contractual rights” and that the Court had no basis to interfere with the risk allocation scheme devised and implemented by the parties.
His Honour therefore dismissed Ozton’s claim for interlocutory injunctive relief.
Key Takeaways - How Does This Case Affect You?
This case reinforces the reluctance of the Court to interfere with contractual arrangements entered into freely between two commercial parties. Specifically, this case solidifies the jurisprudential trends that:
1. Contracts providing an obligation to pay "without deduction" or "without-set-off" exclude all set-offs, including equitable set-off
2.Contractual clauses providing risk allocation should be given full effect
3. Damages are an adequate remedy for breach of express covenannt and derogation from grant where the costs arise out of lost rent from and potential action by subtenants