Chauhan Investments Ltd v Bank of Baroda [1992] FJHC 26; Hbc0288j.89s (16 July 1992)

IN THE HIGH COURT OF FIJI
At Suva
Civil Jurisdiction

CIVIL ACTION NO. 288 OF 1989

Between:

CHAUHAN INVESTMENTS LTD.
Plaintiff

- and -

BANK OF BARODA
Defendant

Mr. V. Maharaj for the Plaintiff
Mr. H.M. Patel for the Defendant

JUDGMENT

In this action the plaintiff company claims specific performance of a contract dated 16th June 1989 and alternatively damages for its breach. The defendant bank on the other hand denies the existence of any contract and pleads in any event its unenforceability under several unparticularised heads including frustration, estoppel and common mistake of law.

At the trial evidence was led concerning the transaction which had taken place between the parties. The plaintiff company called a director and an officer of the bank gave evidence for the defendant.

It is common ground that the plaintiff company is the registered lessee of Crown Land situated on the main street of Labasa Town upon which stands a double-storey commercial building. It is also common ground that since March 1988 when the lease of the previous tenant expired, and up till the date of trial the building remained vacant.

In order to better understand the various issues raised it is necessary to consider at this stage the factual context in which the dispute arose.

Kaushal Chauhan a director of the plaintiff company and principal of the law firm of Messrs. Chauhan and Co. testified that it was on a visit to Labasa in early 1989 that he first learnt of the defendant's interest in leasing the ground floor of the plaintiff's premises.

Upon his return to Suva he made enquiries at the head office of the defendant bank and a meeting was arranged with one of its officers Dalip Kumar where they discussed the prospect of the defendant bank leasing the plaintiff's premises for 10 years comprising an initial lease of 5 years with a renewal option for a further 5 years.

During the discussions his opinion was sought as to how far the bank was legally bound to adhere to a renewal option it had exercised in respect of its existing premises in Labasa which it had leased from R.M.K. (Fiji) Ltd. since November 1982.

After perusing a bundle of documents given to him which included a copy of the relevant R.M.K. lease and correspondence relating to the defendant's exercise of the renewal option, he verbally advised them that as far as he could see the defendant bank was not bound by its letter exercising its option to renew the lease with R.M.K.

He refused however to give a written opinion on the matter and warned the bank officers to seek independent legal advice from their own solicitors as he was an 'interested party'. The bank officers still required a written opinion in case their head office queried the matter and Mr. Chauhan agreed to obtain one from the late Mr. Marquardt-Gray a very senior and well-respected member of the legal profession.

Mr. Gray's short written opinion confirmed Mr. Chauhan's verbal opinion to the effect that the defendant bank was not bound to take the renewal of the R.M.K. lease but for different reasons from that advanced verbally by Mr. Chauhan.

Thereafter Mr. Chauhan and the bank officers met on several occasions and a draft agreement was drawn up which included a schedule of alterations and renovations that were required to be carried out to the plaintiff's premises in order to render it suitable for the defendant's purposes.

A further 2 drafts were to be drawn up over the following 6 weeks with various clauses being added and/or deleted by the parties before the terms and conditions of the disputed Memorandum of Preliminary Agreement was finalised. This latter document was signed and sealed by both parties on the 16th of June 1989 (consented to by the Director of Lands on the 22nd of June 1989).

The following day the plaintiff entered into a building contract with Vikash Builders for the carrying out of the necessary alterations and renovations to its building in Labasa. Construction work began on the 22nd of June 1989 and continued for several days before being suspended ostensibly "... due to the unavailability of such materials which were to be supplied by the (bank) ..." in terms of the agreed Memorandum between the plaintiff and the defendant.

The document the subject matter of dispute between the parties is entitled "Memorandum of Preliminary Agreement to Enter into an Agreement to Lease. Learned counsel for the plaintiff submits that "... notwithstanding the heading the agreement contains all the essential ingredients of a fully immediately operative and binding contract without any conditions for its fulfilment".

In support of the proposition counsel referred to the well known decision of the Court of Appeal (U.K.) in Branca v. Cobarro [1947] 2 All E.R. 101 and 2 decisions at first instance of the New Zealand High Court. The classical formulation of the principle however is to be found in the well-known dicta of Parker J. in Von Hatzfeldt-Wildenburg v. Alexander [1912] 1 Ch. D. 284 when the learned judge said at pp. 288, 289:

"It appears to be well settled by the authorities that if the documents ... relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract either because the condition is unfulfilled or because the law does not recognise a contract to enter into a contract. In the latter case there is a binding contract and the reference to the more formal document may be ignored."

(See also: Masters v. Cameron [1954] HCA 72; [1954] 91 C.L.R. 353 at 360)

Learned counsel for the defendant on the other hand submits that there was only 'preliminary negotiations' between the parties, but in any event, the contract is void and unenforceable owing to the ambiguity and uncertainty of its terms and conditions and also because the entire agreement was conditional upon the defendant being released from its lease with R.M.K.

There can be no doubting that during the course of negotiations and discussions between the parties the defendant bank had on several occasions both verbally and in writing expressed its concern at the possibility of being sued by R.M.K. over its exercise of the renewal option and had sought various assurances from Messrs. Chauhan and Co. should such an eventuality occur.

It is equally clear that the Memorandum of Agreement which the bank eventually executed by its lawful attorney did not contain any such clause. In the circumstances this Court is unwilling to imply the existence of any such term or understanding between the parties particularly where it had been the subject matter of negotiations and had been expressly excluded.

Needless to say the particular 'term' or 'condition' which learned counsel for the bank seeks to imply into the agreement is quite different in form and consequence from that which was discussed between the parties during negotiations.

In "The Didymi" [1988] 2 Lloyds Rep. 108 Lord Justice Nourse expressed with respect the correct legal position in the following passage when he said at p. 117:

"... it has frequently been observed that the creature to which the law gives no effect is an agreement to agree on terms which are not specified. It has always given effect to an agreement to enter into some other agreement on specified terms, the classical example being an agreement to grant and accept a lease in the form of an annexed or scheduled draft."

In my view the present Memorandum of Preliminary Agreement is an illustration of the 'classical example' identified in the above passage and is an agreement which this Court accepts was intended to be binding on the parties until a more formal lease was drawn up between them.

In arriving at this view I have considered that the Memorandum not only contains all the minimum essential terms of a lease such as the identities of the lessor and lessee; a legal description of the property to be leased; the rental and the term of the lease with a fixed starting date but also the parties themselves have partly complied with the terms of the Memorandum on the faith that there was in existence between them a binding and effective agreement.

It is not insignificant that in the defendant's lease with R.M.K. dated the 30th of November 1982 the third recital reads:

"Whereas the Lessor and the Lessee agreed on certain terms and conditions of the tenancy by a correspondence dated the 28th of July, 1982 pending formalisation thereof."

Clearly in that instance the parties acknowledge that agreement on certain terms and conditions had been reached some time before the formal lease was drawn up and executed.

Learned counsel for the bank however seeks to invoke the provisions of Section 13 of the Crown Lands Act (Cap. 132) which strictly prohibits any 'dealing' with a 'protected lease' without the prior written consent of the Director of Lands.

In this regard I am more than satisfied that the Memorandum of Agreement was not a 'dealing' with the plaintiff's lease within the terms of the section and whilst the renovations to the building may constitute a 'dealing' with the land, the uncontraverted evidence is that the possession of the site by the plaintiff's agent and renovation work did not occur until the 22nd of June 1989 on which date the consent of the Director of Lands was signified on the Memorandum.

Then there was counsel's complaint at the vagueness and uncertainty of some of the terms of the Memorandum which rendered it void and unenforceable. I accept that the 'terms' complained of could have been more clearly and carefully worded but difficulty of interpretation is no reason for holding that no agreement existed between the parties.

In Cudgen Rutile (No.2) Pty. Ltd. v. Chalk [1975] A.C. 520 Lord Wilberforce when delivering the judgment of the Privy Council, after referring to a submission that an agreement for a lease was ineffective or illusory because it left a number of essential terms to be determined by the Minister of Mines, said at p. 536:

"... in modern times, the courts are readier to find an obligation which can be enforced, even though apparent certainty may be lacking as regards some terms such as the price, provided that some means or standard by which the term can be fixed can be found."

With that in mind I approach the present case where counsel complains at the vagueness of phrases such as "automatic option for renewal" in the Renewal of Lease Clause; "political and economic reasons" in the Notice of Termination clause and the absence of any formula for quantifying the rent upon the exercise of the renewal option.

In the first place all the clauses complained of may be considered non-essential or ancillary provisions that affect the renewal or termination of the lease and not its existence but in any event, to paraphrase Megarry J. in Brown v. Gould [1971] 1 All E.R. 1505, it has not been demonstrated to this Court that the clauses are uncertain in the sense of being meaningless or have such a wide variety of meanings as to make it impossible to say which was intended. The 'test' of uncertainty is not whether the clause is proof against wilful misrepresentation, but rather whether someone genuinely seeking to discover its meaning is able to do so.

Furthermore the incorporation of "... other usual general (as opposed to special) provisions ..." such as those contained in an identified lease with which the parties are familiar, is not such an unusual or uncertain term as to negate the existence of a concluded agreement.

In rejecting a similar argument on a similarly-worded clause in an agreement to lease in Sweet & Maxwell Ltd. v. Universal News Services Ltd. [1964] 2 Q.B. 699, Harman L.J. said at p.726:

"It seems to me that if A agrees with B to grant him a lease at such a rent on such and such terms beginning on such a day, and no more, that is a specifically enforceable agreement, and the court will insert in it what are called "usual" covenants. Those were defined in a case before Jessel M.R. being very jejune covenants indeed. In a later case before Maugham J. he said that it was a question of fact as to what were "usual covenants" and that the court will accept evidence from surveyors or conveyancers of the kind of covenants which were usual in leases of the kind of property which was the subject matter of the agreement."

As for the absence of a formula for fixing the rental upon renewal of the lease that is not an insurmountable problem (if at all) nor is it one which leads to contractual uncertainty. In A.G. v. Barker Bros. Ltd. [1976] 2 N.Z.L.R. 495 Richmond P. in dealing with a renewal option in which the parties had provided the machinery for resolving disputes but no formula (as in the present case) said after examining various well-known authorities, at p.503:

"It seems to me that once the court is satisfied that the parties have provided, by means of an arbitration clause, a machinery to settle the terms and conditions of a renewal lease, then the court should give effect to that intention unless it can be seen that the lack of some stated formula or standard will render the task of the arbitrators impossible in practice. In my view, that is not the situation in the present case."

In light of the foregoing I am satisfied that the parties intended to be bound by the terms of the Memorandum executed by them until such time as it was replaced by a more formal lease.

Having thus held that there was a firm contract between the parties I turn next to consider the rather vexed question of Undue Influence arising from the evidence in the case and the relationship (if any) that existed between the parties.

The equitable doctrine of "undue influence" was succinctly described by Lindley L.J. in Allcard v. Skinner [1887] UKLawRpCh 151; [1887] 36 Ch.D 145 when he said at p. 181 in a less cited passage (than Cotton L.J.'s at p.171):

"The doctrine relied upon ... is the doctrine of undue influence. These cases may be subdivided into two groups which however, often overlap.

First, there are the cases in which there has been some unfair and improper conduct, some coercion from outside, some over-reaching, some form of cheating, and generally, though not always, some personal advantage obtained by a donee, placed in some close and confidential relation to the donor. The second group consists of cases in which the position of the donor to the donee has been such that it has been the duty of the donee to advise the donor ... In such cases the Court throws upon the donee the burden of proving that he has not abused his position, and of proving that the gift made to him has not been brought about by any undue influence on his part. In this class of case it has been considered necessary to show that the donor had independent advice, and was removed from the influence of the donee when the gifts to him was made." (my underlining)

Before reviewing the facts however there are 2 further passages from judgments of the Privy Council that may usefully be borne in mind:

The first occurs in the case of Kali Buksh Singh v. Ram Gopal Singh [1913] 30 T.L.R. 138 at p. 139 where Lord Shaw said of the requirement of 'independent advice':

"The possession of independent advice, or the absence of it, was a fact to be taken into consideration and well weighed on a review of the whole circumstances relevant to the issue whether the grantor thoroughly comprehended, and deliberately and of her own free will carried out the transaction ... if the conclusion was reached that the obtaining of independant advice would not really have made any difference in the result, then the deed ought to stand."

Then in Poosathurdi v. Kanappa Chettiar [1919] L.R. 47 (Indian Appeal Cases) Lord Shaw said of the nature of 'undue influence':

"It is a mistake ... to treat undue influence as having been established by proof of the relations of the parties having been such that the one naturally relied upon the other for advice, and the other was in a position to dominate the will of the first in giving it. Up to that point 'influence' alone has been made out. Such influence may be used wisely, judiciously and helpfully. But ... more than mere influence must be proved to render influence, in the language of the law 'undue'. It must be established that the person in a position of domination has used that position to obtain unfair advantage for himself, and so as to cause injury to the person relying upon his authority or aid."

Bearing those principles in mind I turn to the facts. It is beyond dispute that Mr. Chauhan was at all times an 'interested party' in the negotiations that took place between the plaintiff company and officers of the defendant bank not only in his capacity as a director of the plaintiff but also in whatever advice he gave the bank in his capacity as a man trained in the law.

In this latter regard whilst I would not go so far as to say that the advice given was not honestly held or rendered in good faith nevertheless it cannot be considered entirely devoid of 'self-interest' even if it was unpaid for. Needless to say that advice has not been shown to be either wrong or negligent but in any event need not be determined in these present proceedings.

Be that as it may I am satisfied that Mr. Chauhan was in a position to influence the officers of the bank and did influence them in signing the Memorandum.

But, whether that influence was "undue" I am equally satisfied from the evidence that it was not and reference need only be made to the answers of Dalip Kumar in cross-examination and re-examination in that regard. I am also mindful that we are here dealing with trained and experienced officers of a commercial bank and a solicitor negotiating the terms of a familiar agreement.

It is admitted by the defendant's own witness that Mr. Chauhan had declared his interest from the out-set and advised him to seek independent legal advice. The bank prior to executing the Memorandum had sought and received independent legal advice verbally (later confirmed in writing) that it was bound to take a renewal of the R.M.K. lease which it chose to ignore. Subsequently a second independent legal opinion along similar lines was ignored (albeit after it had executed the Memorandum) when the bank sought to terminate the R.M.K. Lease.

Put simply, before signing the Memorandum the bank had before it 3 legal opinions concerning the legal status of the R.M.K. lease, 2 against and 1 for. These were all considered and the bank chose to go with the majority.

Needless to say I was not moved by the suggestions of the witnesses for both parties that neither was keen to let out or take a lease of the premises in question.

The undeniable fact remains that the plaintiff's premises was under mortgage, had been vacant for over a year and would undoubtedly have been a drain on the financial resources of the plaintiff company. Equally the attractiveness of the plaintiff's premises to the defendant bank cannot be denied. It was a third larger in area than its existing premises, the rental was $500 cheaper and the plaintiff company had agreed to carry out all necessary alterations and renovations to the premises at its own expense.

As for the hotly disputed question of whether or not a 'solicitor/client' relationship existed between Mr. Chauhan and the bank sufficient to raise a presumption of 'undue influence' within the second group enunciated by Lord Lindley (op cit), after considering all that has been urged in that regard in the comprehensive submissions of learned counsel for the defendant and the evidence of Dalip Kumar, I am not at all persuaded that Mr. Chauhan was untruthful in his denials and I prefer and believe his evidence in this regard which was given confidently and in a forthright manner. Moreover it had a 'ring of truth' to it.

Needless to say vague expressions such as: "... we took it that he was acting for the bank ..." and "... after all the discussions he took our instructions ..." falls well short in my mind of establishing a 'client/solicitor' relationship.

In my view it could not have been anything but obvious to the bank and its officers during the course of the various drafts and redrafts of the Memorandum that Mr. Chauhan acted almost solely in the interests of the plaintiff company. I note also that in his first letter to the defendant bank dated 2nd May 1989 (Ex.'E') seeking an appointment for a second conference he describes the plaintiff company as "... our client Chauhan Investment Ltd." This has not been questioned as one might have expected if the bank honestly and reasonably believed that Mr. Chauhan was acting for it.

Then much has been made of Mr. Chauhan's letter to Messrs. Marquardt-Gray & Co. (Ex.'B') which begins: "We act for Bank of Baroda ..." and in which he describes the bank as "our client", but with all due regard to learned defence counsel's views on the matter quite literally the letter can be and in my view ought to be read and I accept it to mean that on the narrow issue on which counsel's opinion was sought Mr. Chauhan was acting for the defendant bank and nothing more.

There is not a shred of credible evidence to support the assertion that Mr. Chauhan was acting for the bank in respect of any of the negotiations and/or drafts of the Memorandum which he personally executed for and on behalf of the plaintiff company in his dual capacities of Director/Secretary.

With hindsight it would have been better for Mr. Chauhan to have refused even to proffer a verbal opinion but in the particular context and circumstances in which it was given coupled with the accompanying caution to seek independent legal advice and the existence of such advice, I do not accept that any gross impropriety occurred.

I have come to the firm conclusion that there was in existence between the parties a firm and binding contract which was intended and voluntarily entered into without any undue influence such as to render it voidable at the instance of the bank.

Accordingly I find that the bank was in breach of the agreement (Ex.'I') and by its breach the plaintiff company is entitled to claim damages.

I have not ignored the plaintiff's primary claim for specific performance or of the partial performance by both parties of some of the terms of the Memorandum, rather I have come to the conclusion on the evidence and submissions not only that the plaintiff company may be adequately compensated in damages but that this court ought not to exercise its discretion to grant a remedy which would cause totally disproportionate hardship to the defendant bank.

As for the question of damages learned counsel for the bank submits that the plaintiff has failed to mitigate its damages and is thereby disentitled from claiming damages. Furthermore since the plaintiff had undertaken contractually to bear all the costs in effecting the necessary alterations to its premises therefore the bank should not be made liable for them.

With respect I cannot agree. The present proceedings were instituted in August 1989 after it became patently clear to the plaintiff that the bank had no intention of further honouring the contract between them. This cannot be considered dilatory as the first inkling the plaintiff had of the bank's non-performance occurred in early July 1989.

Furthermore the submission that the plaintiff should bear the entire cost of the alterations sits uncomfortably on the court's mind when it is clear beyond a doubt that the alterations to the plaintiff's premises were effected as a direct and unavoidable result of the parties agreement in the Memorandum and must now be considered wasted as a result of the defendant's breach.

In Anglia Television Ltd. v. Reed [1972] 1 Q.B. Lord Denning M.R. in upholding an award for wasted pre-contract expenditure affirmed the relevant principle when he said at p.64:

"... wasted expenditure can be recovered when it is wasted by reason of the defendant's breach of contract. It is true that, if the defendant had never entered into the contract, he would not be liable, and the expenditure would have been incurred by the plaintiff without redress; but the defendant having made his contract and broken it, it does not lie in his mouth to say he is not liable, when it was because of his breach that the expenditure has been wasted."

The relevant building contract was executed the day after the Memorandum was signed and alterations to the premises were effected with the knowledge, approval and active assistance of the defendant bank by the supply of some materials from its existing premises.

Needless to say the alterations have significantly transformed the nature and character of the plaintiff's premises and detrimentally affected its leasing potential. Where it once housed 3 separate shops it is now (in the words of Mr. Chauhan) "... a big hall with 2 poky rooms at the rear ... with an incomplete strong room". In that state and with a generally depressed market for rental premises, let alone a 'customised' one such as the plaintiff has, it is of little wonder that all the plaintiff's attempts to lease or sell the premises "as is" (of which there were several) have met with little success.

Having considered the matter I am satisfied that this is a case in which the usual principle "restitutio in integrum" ought to be applied in the assessment of damages. I am also mindful that the initial drafts of the Memorandum contained a liquidated damages clause (inserted by the plaintiff) in the sum of $20,000 for non-performance of the agreement.

In the circumstances having regard to the largely undisputed evidence adduced by the plaintiff as to the particular and special expenses incurred on its part firstly in partly performing the agreement and then in seeking to mitigate its losses, and further mindful of the expenditure necessary to reinstate the premises to its former condition, I award the plaintiff company damages as follows:

(a) For breach of contract: $20,000

(b) For wasted expenses: $ 5,600

(c) For reinstatement: $18,000

TOTAL: $43,600

together with interest thereon at the rate of 7% p.a. with effect from the 17th of August 1989 until payment.

(D.V. Fatiaki)
JUDGE

At Suva,
16th July, 1992.

HBC0288J.89S