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PEBRUK NOMINEES PTY LTD v WOOLWORTHS (VICTORIA) PTY LTD & ANOR

Judges:
Blow J

Court:
Supreme Court of Tasmania

MEDIA NEUTRAL CITATION: [2003] TASSC 94

Judgment date: 3 October 2003

Blow J

This action concerns a dispute between the parties as to the computation of the rent of a supermarket. The plaintiff is the owner of the premises. It leased the premises to the first defendant in 1994, before Australia was blessed with a goods and services tax, for a term of 25 years. The lease included an option clause, which provides for its renewal for two further terms of 10 years each. The first defendant assigned the lease to the second defendant with effect from 1 July 2002. The lease provides for the annual rent, as from the third year of the lease, to include a component calculated by reference to the lessee's ``Gross Sales''. The parties are in dispute as to whether the GST payable by the defendants in respect of their

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supplies of goods and services is to be excluded from the ``Gross Sales'' in calculating the annual rent. GST became payable in respect of taxable supplies made after 1 July 2000 pursuant to the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (``the GST Act''). The first defendant made taxable supplies in respect of the enterprise it carried on upon the premises from 1 July 2000 to 30 June 2002. Thereafter the second defendant has made taxable supplies in respect of that enterprise.

2. The Master has made an order in the following terms:

``That the Court determine, as a preliminary issue, the issue raised in par13 of the amended statement of claim, namely what is the proper construction of the term `gross sales'.''

Paragraph 13 of the amended statement of claim reads as follows:

``The plaintiff asserts and the first and second defendants deny that for the purpose of calculating the percentage rent payable under the lease, the gross sales is the actual sale price of the goods sold by the defendant without any reduction for the defendant's liability to pay GST in respect of those sales.''

3. Clause 2 of the lease contains covenants as to the payment of rent. That clause includes the following:

``2 RENT

The Lessee covenants and agrees with the Lessor that:

  • (a) Base Rent
    • The Lessee will pay to the Lessor the Base Rent in respect of each lease year (including any renewal) of the Term of this Lease.
  • (b) Percentage Rent
    • (i) Commencing from the third lease year the Lessee will pay to the Lessor the Percentage Rent in respect of each lease year (including any renewal) of the Term of this Lease;
    • (ii) The Percentage Rent (if any) shall be paid by the Lessee to the Lessor within fourteen (14) days of the issue of the Lessee's Auditor's statement of the Gross Sales for the relevant lease year.
  • (c) Rent Review
    • ...
  • (d) Instalments
    • If this Lease commences on a day other than the first day of the month the first and last instalments of rent shall be proportionate ones. The Base Rent shall be payable in advance by monthly instalments on the first day of each month and such monthly instalments shall be one twelfth (1/12th) of the Base Rent. A goods and services tax (if any) payable on any instalment of the Base Rent shall be borne by the Lessor.
  • (e)...''

4. Clause 1 of the lease sets out a series of definitions, including the following:

```Gross Sales' means the amount of the actual sales price (including any sales tax but excluding value added tax, retail tax, goods and services tax, or any similar tax which the Lessee is required to add to the price of goods sold) of merchandise and services sold and provided by the Lessee or proceeds received by the Lessee from any Licensees and Concessionaires of the Lessee or other person in or from the demised premises during the Term and shall mean and include all sales whether by cash terms (including hire purchase or lay-by) or credit sales whether by cash terms (including hire purchase or lay-by) or credit and the commission and hiring fees payable to the Lessee in respect of any vending machine and hire ride machine in or about the demised premises.

There shall be excluded from the term `Gross Sales':

  • (i)...
  • ...
  • (xiv) the amount of any value added tax or any tax calculated in respect of sales by retailers payable in respect of the gross sales to any Federal, State government or other relevant authority;

...

`Percentage Rent' means the percentage rent payable by the Lessee calculated as provided in the First Schedule.

...

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`Threshold Level' means the Lessee's Gross Sales in the second lease year of the Term of this Lease. Where this Lease is one of a series of two or more consequential leases each of which (except the first) was granted pursuant to an option contained in the immediately preceding lease in the series the Threshold Level will be the Lessee's Gross Sales in the second lease year of the first lease in the series.''

5. The first schedule to the lease provides as follows:

  • ``The Percentage Rent for each lease year is an amount calculated to be the Percentage of the Lessee's Gross Sales in the lease year in which the calculation is made.
  • For the purpose of this calculation:
  • ``Percentage'' means-
    • 2% of the Lessee's Gross Sales up to $30,000,000;
    • 1.5% in excess of $30,000,000.
  • In excess of the Threshold Level.
  • By way of example: 
       Assume: Threshold level is $27,000,000 (Lease Year 2)
           Lessee's Gross Sales in Lease Year 3 are $34,000,000

   Percentage Rent =

   ( 2  x $30m - $27) + (1.5 x $4m)
    ---                  ---
    100                  100

   = ($60,000) + ($60,000)

   = $120,000''

6. It is clear from the definition of ``Gross Sales'' and from cl 2(d) of the lease that the parties foresaw the possibility of the introduction of one or more new taxes, and decided to include provisions in the lease accordingly. However the plaintiff contends that GST, as introduced by the GST Act, is a tax of such a nature that the terms of the lease do not require any deduction to be made in respect of it when determining the ``Percentage Rent'' payable in respect of the premises. Essentially, the plaintiff contends that the definition of ``Gross Sales'' requires the exclusion only of any tax ``which the Lessee is required to add to the price of goods sold'', whereas GST is not added to the price of goods sold, but is calculated as a fraction of the sale price and paid by the supplier of a taxable supply. The defendants contend that the lease requires GST to be excluded from ``Gross Sales'' and thus excluded from the calculation of ``Percentage Rent''.

7. The plaintiff company purchased the supermarket premises from Woolworths Properties Pty Ltd. It was a term of the contract whereby it purchased the property that it would lease it to the first defendant. The lease is dated 5 January 1995, but it provides that the lease term of 25 years runs from 13 December 1994, which was the completion date provided for in the contract of sale. The negotiations that led to the purchase and the lease commenced in or about June 1994. The purchase contract and the form of lease, which was an annexure to that contract, were initially sent in draft form by a firm of solicitors acting for the vendor company and the first defendant to the solicitors for the plaintiff. Amendments to the draft documents were agreed upon by the parties, but the terms of the final documents were largely those of the first drafts submitted by the solicitors for the vendor and the first defendant. I mention those facts at this stage because the plaintiff sought to rely on the contra proferentem rule, to which I will refer later.

8. Counsel for both sides invited me to construe the lease by reference to the commercial context existing in 1994 when its terms were negotiated. The introduction of GST on 1 July 2000 was preceded by some 25 years of discussion in relation to tax reform. The taxation of goods and services was considered by the Taxation Review Committee whose report, sometimes referred to as the Asprey Report, was published on 31 January 1975. A draft white paper entitled ``Reform of the Australian Tax System'' published in June 1985 included a chapter entitled ``Broadening the Consumption Tax Base''. On 21 November 1991 the Liberal and National Parties published a policy paper entitled ``Fightback!'', which proposed the introduction of a goods and services tax. All of these publications referred to consumption taxes, goods and services taxes, and value added taxes introduced in other countries. Mr Murphy SC, for the plaintiff, pointed out that some such regimes provided for tax to be separate from and additional to the price of goods sold or services rendered, whereas others provided for the price of goods or services to be a gross price that included a tax component.

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9. The tax proposed by ``Fightback!'' was in the former category. That is evident from the following passage in the ``Fightback!'' policy paper at 69:

``The Goods and Services Tax is charged, except in the case of exempt supplies, every time a business supplies goods or services in the course of its business activity. Goods and Services Tax paid in this way is collected by the business which supplies the goods or services on behalf of the Taxation Office and is remitted to the Taxation Office at the end of fixed periods by means of lodgement of regular returns.''

Similarly, the Canadian goods and services tax is a tax payable by the recipient of a taxable supply: Excise Tax Act [RS 1875, c E-15] (Can), s 168(1). On the other hand, value added tax in the United Kingdom is a liability of the person who makes a supply of goods or services, and is a component of the consideration payable for such goods or services: Value Added Tax Act 1994 (UK), ss 1, 2, 19, 24. That Act received the Royal Assent on 5 July 1994, but replaced earlier VAT legislation. Similarly, the goods and services tax payable in New Zealand is a component of the consideration payable for the supply of goods and services: Goods and Services Tax Act 1985 (NZ), s 10(2).

10. It is clear that Australian GST is in the same category as British VAT and New Zealand GST. In effect, it provides that the price paid by a consumer comprises two components - the value of a taxable supply, and the GST on that taxable supply. The meaning of ``taxable supply'' is dealt with in the GST Act, s 9-5, which reads as follows:

``You make a taxable supply if:

  • (a) you make the supply for consideration; and
  • (b) the supply is made in the course or furtherance of an enterprise that you carry on; and
  • (c) the supply is connected with Australia; and
  • (d) you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.''

The rate of GST is dealt with in s 9-70, which reads as follows:

``The amount of GST on a taxable supply is 10% of the value of the taxable supply.''

The ordinary meaning of the ``value'' of a taxable supply is dealt with in s 9-75(1), which reads as follows:

``(1) The value of a taxable supply is as follows: 

   Price x 10
           --
           11

where:

price is the sum of:

  • (a) so far as the consideration for the supply is consideration expressed as an amount of money? the amount (without any discount for the amount of GST (if any) payable on the supply); and
  • (b) so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration. 
   Example: You make a taxable supply by selling a car for $22,000
            in the course of carrying on an enterprise.

            The value of the supply is:

            $22,000 x 10 = $20,000
                      --
                      11

The GST on the supply is therefore $2,000 (ie 10% of $20,000).''

(It seems to me to be unnecessarily cumbersome first to calculate 10/11ths of the price, and then to calculate 10 per cent of that figure. The same result can be achieved by dividing by 11. But perhaps that was politically unacceptable, for reasons that I do not understand.)

11. Of course a supplier is entitled to claim an input credit in respect of creditable acquisitions made after 1 July 2000 against the amounts of GST that it is required to pay: GST Act, Div11. An input tax credit is not a reduction of the GST payable by a supplier, but an amount due to the supplier as a consequence of its acquisition of taxable supplies.

The submissions for the plaintiff

12. In the first few lines of the definition of ``Gross Sales'' in the lease, there is an express

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exclusion of ``value added tax, retail tax, goods and services tax, or any similar tax which the Lessee is required to add to the price of goods sold''. The plaintiff contends that the words ``which the Lessee is required to add to the price of goods sold'' must be read distributively, ie, that those words do not just qualify the expression ``any similar tax'', but also qualify the words ``value added tax, retail tax, goods and services tax''. Thus, it was submitted that the definition of ``Gross Sales'' does not exclude Australian GST, since it is not required to be added to the price of goods sold, but forms a component of the price. Mr Murphy SC drew attention to the choice of the word ``required''. He submitted that there is nothing in Australia's GST legislation that requires an amount to be added to what would otherwise have been the sale price.

13. Mr Murphy SC drew my attention to a number of pieces of legislation that were enacted in relation to the introduction of GST. Sales tax under the Sales Tax Assessment Act 1992 (Cth) was abolished by the A New Tax System (End of Sales Tax) Act 1999 (Cth), s 3. The Trade Practices Act 1974 (Cth) was amended to prohibit price exploitation in relation to the introduction of GST. See ss 75AT-75AZ thereof. Thus, whilst corporations could lawfully increase prices in consequence of the introduction of GST, it by no means followed that they could always increase them by 10 per cent. For example, allowance had to be made for the effects of the abolition of other taxes, such as sales tax. It was submitted that the amendments to the Trade Practices Act make it clear that GST is not a tax that a supplier is ``required to add to the price of goods sold''.

14. The opening words of the definition of ``Gross Sales'' in the lease expressly include sales tax in ``the actual sales price... of merchandise and services sold and provided by the Lessee''. Under the Sales Tax Assessment Act, sales tax was imposed on wholesalers. It was not imposed on consumers. The business carried on at the supermarket was of course a retail business, but it is possible that it included a small wholesale component. If so, the liability to pay sales tax was a liability of the lessee. Counsel for the plaintiff argued that it followed that the express inclusion of sales tax in the definition of ``Gross Sales'' tends to indicate that the parties intended to exclude from that definition only tax for which the customers of the lessee were liable, ie, taxes which the lessee was ``required to add to the price of goods sold''.

15. Counsel for the plaintiff submitted that it would not be reasonable for the lessee's rent to be increased in consequence of the lessee collecting tax payable by its customers, which it was obliged to remit to the Commissioner of Taxation; that GST is payable by the lessee, rather than its customers; and that the evident intention of the parties was to exclude from the definition of ``Gross Sales'' only tax payable by the lessee's customers.

16. In relation to subcl (xiv) of the definition of ``Gross Sales'', which expressly excludes ``the amount of any value added tax or any tax calculated in respect of sales by retailers payable in respect of the gross sales to any Federal, State government or other relevant authority'', counsel for the plaintiff emphasised that ``value added tax'' was specifically mentioned, whereas GST was not. Expressio unius est exclusio alterius. Further, it was submitted that subcl (xiv) lends strength to the argument that the express exclusion of goods and services tax from the definition of ``Gross Sales'' applies only to a goods and services tax ``which the Lessee is required to add to the price of goods sold''. It was argued that the effect of subcl (xiv) is to require the exclusion of any value added tax, whether payable by the lessee out of the sale price, or required to be added by the lessee to the price of goods sold. On that construction, both species of value added tax would be excluded in calculating ``Gross Sales'', but only one species of goods and services tax would be excluded when calculating ``Gross Sales''. It was argued that, since the terms ``value added tax'' and ``goods and services tax'' are used separately, the lease must treat those two terms as describing two different sorts of taxes. It was also submitted that subcl (xiv) relates to any tax calculated in respect of sales by ``retailers'', but that GST applies in respect of supplies by suppliers generally, and not just to sales by retailers. As I understand it, the plaintiff contends that the exclusion in relation to ``any tax calculated in respect of sales by retailers'' was intended to apply only to a tax that was imposed solely in respect of sales by retailers.

17. Counsel for the plaintiff at one point submitted that excluding GST when calculating

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``Gross Sales'' would result in a terrific windfall to the defendants because their input credits would have to be ignored, and the abolition of sales tax would have to be ignored.

18. It was submitted for the plaintiff that all of the above arguments led to the conclusion that the definition of ``Gross Sales'' is unambiguous in relation to the taxes to be excluded, and that GST is not a tax that falls within the class of taxes to be excluded. In the alternative, it was submitted that if the definition of ``Gross Sales'' is ambiguous as to the sorts of taxes required to be excluded, the ambiguity ought to be resolved in favour of the plaintiff in accordance with the contra proferentem rule. Initially Mr Murphy SC based that argument on the fact that the exclusionary provision is contained in a lease that was prepared by the solicitors for the first defendant. Subsequently Dr Croft SC argued for the plaintiff that the contra proferentem rule required any ambiguity to be resolved against the party in whose favour the relevant stipulation was made. He indicated that there were differing views as to whether the identity of the drafter of the document was relevant to the contra proferentem rule, but submitted that in this instance ``the evidence is that the drafter of the lease was the defendant''. He submitted that the operation of the contra proferentem rule was not limited to exclusion clauses, but that the relevant provisions in the definition of ``Gross Sales'' constituted an exclusion clause for the purpose of the contra proferentem rule.

19. Mr Murphy SC submitted that if GST is to be excluded in calculating ``Gross Sales'', the terms of the lease did not simply require the exclusion of one eleventh (or 10 per cent of 10/11ths) of the price of the lessee's taxable supplies. He submitted that the terms of the lease required the lessee's input credits and the abolition of sales tax to be brought into account. I will refer to this argument as the plaintiff's fallback argument. Mr Murphy SC submitted that input credits and the abolition of sales tax were required to be brought into account by subcl (xiv) of the definition of ``Gross Sales''. He argued that if GST was to be excluded in calculating ``Gross Sales'', then it must be excluded as a ``value added tax'' to which subcl (xiv) applied. He relied on the amendments to the Trade Practices Act prohibiting price exploitation. He relied on the GST Act, ss 7-1 to 7-15. Essentially those sections provide that the net amount that an entity must pay to the Commonwealth for a tax period is the amount of GST payable on taxable supplies and taxable importations, less that entity's input tax credits on creditable acquisitions and creditable importations.

The defendants' contentions

20. The principal contentions of the defendants as to the interpretation of the definition of ``Gross Sales'' can be summarised as follows:

  • (a) The GST is a ``value added tax'' within the meaning of that term in the opening words of the definition.
  • (b) The GST is a ``goods and services tax'' within the meaning of that term in the opening words of the definition.
  • (c) The GST is a ``similar tax which the Lessee is required to add to the price of goods sold'' within the meaning of the definition.
  • (d) The GST is a ``value added tax'' within the meaning of subcl (xiv) of the definition.
  • (e) The GST falls within the description, ``any tax included in respect of sales by retailers payable in respect of the gross sales to any Federal, State government or other relevant authority'' in subcl (xiv) of the definition.
  • (f) The interpretation favoured by the plaintiff would result in an anomaly. If a new tax has the effect that part of the money coming through the lessee's cash registers would have to be remitted to the Commissioner of Taxation, it would be anomalous if the lessee had to pay an increased rent by reference to the gross receipts. The parties must not have intended the definition to have a meaning that would produce such a result.

21. The defendants contend that when used in the definition of ``Gross Sales'', the terms ``value added tax'' and ``goods and services tax'' were not intended to be mutually exclusive. They contend that GST is a ``goods and services tax'' within the meaning of the definition because it is imposed by reference to taxable supplies, which may be supplies of goods or services. They contend that GST is a ``value added tax'' within the meaning of the definition because businesses are entitled to an input tax credit for GST paid on their inputs, with the result that they directly bear GST only

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in relation to the value adding for which they are responsible. They contend that GST is a tax which the lessee is ``required to add to the price of goods sold'' in the sense that it is required to be added to what the GST Act calls ``the value of a taxable supply''.

22. The defendants contend that the words ``which the Lessee is required to add to the price of goods sold'' were not intended to be read distributively, but only to qualify the words ``or any similar tax''. If so, any value added tax or goods and services tax would have to be excluded when calculating ``Gross Sales'', even if the tax in question was not required to be added to the price of goods sold. The defendants contend that such an interpretation represents the ordinary meaning of the words ``excluding value added tax, retail tax, goods and services tax, or any similar tax which the Lessee is required to add to the price of goods sold''. They contend that the terms ``value added tax'', ``retail tax'', and ``goods and services tax'', at the time the lease was drafted, were sufficiently familiar for no qualification or further explanation to be needed, but that the same is not true of the words ``any similar tax''. It was submitted that the use of the words ``value added tax'' in subcl (xiv) without any qualification lends support to that argument. It was submitted that it would be peculiar for the parties to have excluded in the early part of the definition only those value added taxes which the lessee was required to add to the price of goods sold, and then to have excluded all value added taxes by subcl (xiv).

23. Mr Gleeson SC submitted for the defendants that, even if the words ``which the Lessee is required to add to the price of goods sold'' were read distributively, the result would still favour his clients. He submitted that, within the meaning of the definition, GST is required to be added to the ``price of goods sold'', since those words refer to the amount that the customer would, but for the tax, have had to pay for the goods. He submitted that the word ``price'', when first used in the definition as part of the term ``the actual sale price'' meant a price inclusive of the excluded taxes, whereas the next use of the word ``price'', in relation to a tax or taxes ``which the Lessee is required to add to the price of goods sold'', was referring to a price net of any excluded tax.

24. Mr Gleeson SC submitted that there is a requirement that GST be added to the price of goods sold, in two senses. First, he submitted that the necessary, practical and intended effect of the legislation is that the actual sales price will include GST passed on to the consumer. He supported that argument by referring to
ACCC v Signature Security Group Pty Ltd (2003) ATPR ¶41-908; [2003] FCA 3, in which Stone J said at par 3:

``... It is sufficient to note that although the supplier of goods and services is responsible for the payment of the GST to the revenue authorities, it is the consumer who is intended to carry the financial burden, which will be reflected in the price paid by the consumer. In other words, the GST Act does not impose any obligation on a consumer to pay GST. Implementation of the policy that the consumer should bear the ultimate burden relies on commercial reality that the cost of the GST will, sooner or later, be reflected in the price payable by the consumer.''

Secondly, Mr Gleeson SC argued that the GST Act, in effect, requires sellers to add a discrete tax item to what would otherwise be the price.

25. The defendants contend that the reference in subcl (xiv) to ``any tax calculated in respect of sales by retailers'' is not limited to taxes imposed only in relation to sales by retailers, but that those words are intended to catch any tax payable in respect of sales by retailers, even if it applies to other sorts of transactions.

26. In relation to the express inclusion of ``any sales tax'' in ``the actual sales price'' for the purpose of the definition of ``Gross Sales'', Mr Gleeson SC drew my attention to the definition of ``Threshold Level''. He submitted that it must have been the intention of the parties that the first defendant would have the first year of the lease to start to develop the premises appropriately; that the second year would be treated as a good measure of the sales that could be earned from the premises; and that the lessee would have to pay an appropriate share of the increases over the gross sales for the second year. In substance, he submitted that the parties intended an apples-with-apples comparison between the second year and each subsequent year for the purposes of calculating the ``Percentage Rent'', and chose to effect that by comparing gross sales inclusive of sales tax in respect of the second year and each subsequent year. He submitted that at the time

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the lease was executed, the parties would have expected tax reform not to have occurred until after the second year.

27. Mr Gleeson SC submitted that the parties could not have predicted how any future tax would be structured, so that no clause could perfectly allow for all anomalies, and that they must have included subcl (xiv) in order to avoid any doubt as to the scope of the opening words of the definition of ``Gross Sales''.

28. In relation to the contra proferentem rule, Mr Gleeson SC submitted that the clause in question is not an exclusion clause but a definitions clause, and that there was no scope for the application of that rule.

29. Mr Gleeson SC submitted that the plaintiff's ``fallback argument'' had not been raised on the pleadings, and was outside the scope of the preliminary issue that the Master's order requires the Court to determine. He submitted that it would be necessary for the pleadings to be amended before that argument could properly be dealt with. However he also made a number of substantive submissions as to that argument. He submitted that GST is a ``value added tax'' within the meaning of subcl (xiv) of the definition of ``Gross Sales''; that an input tax credit is not a reduction of the GST payable by the supplier, but an amount due to the supplier as a consequence of its acquisition of taxable supplies; and that the amount to be excluded when calculating ``Gross Sales'' must therefore be calculated without reference to input credits. He submitted that making allowance for input credits and the abolition of sales tax would make it necessary for very complicated and difficult calculations to be undertaken, and that the parties must not have intended to create such a state of affairs.

Interpretation of the definition of ``Gross Sales''

30. In view of the conflicting submissions by counsel as to the role of the contra proferentem rule in relation to the interpretation of the lease, I will deal with that topic first. The rule in question is derived from the Latin maxim verba chartarum fortius accipiuntur contra proferentem. This maxim has been translated as ``The words of a deed are to be interpreted most strongly against him who uses them'' (Jowitt's Dictionary of English Law, 2 ed, 1854), and as ``Every man's grant shall be taken most strongly against himself'' (Halsbury's Laws of Australia, par140-540). There is a general rule of interpretation that a deed or instrument will be construed against the grantor, and in favour of the grantee. See, for example, Neill v Duke of Devonshire (1882) 8 App Cas 135 at 149; Williams v James (1867) LR 2 CP 577 at 581; Burton & Co v English & Co (1883) 12 QBD 218 at 220. The contra proferentem rule is often significant in relation to the interpretation of exclusion clauses in contracts. When it is applied in that context, the ambiguity is resolved in favour of the party for whose benefit the exclusion clause was inserted in the contract. See, for example,
Darlington Futures Ltd v Delco Australia Pty Ltd (1987) 5 ACLC 132; (1986) 161 CLR 500.

31. In this case, counsel for the plaintiff submitted that the disputed provisions in the lease as to the exclusion of certain taxes for the purpose of calculating ``Gross Sales'' were exclusion clauses to which the case law concerning the contra proferentem rule should be applied. I disagree. The reported cases concerning the application of the rule to exclusion clauses concern clauses which exclude, restrict, limit or qualify common law contractual rights which parties would otherwise have. See Carter and Hyland, Contract Law in Australia, 4 ed, par748 and the cases there cited. The provisions whose interpretation is in question in this case do not exclude, restrict, limit or qualify common law contractual rights. They are concerned with the calculation of the lessee's annual rent by reference to the prices paid in respect of its sales. The contra proferentem rule may have special significance in the interpretation of an exclusion clause, but this case concerns the interpretation of provisions as to the computation of rent. In that context, the contra proferentem rule can sometimes be relevant, but only as a rule of last resort, or ``very late resort'': The Olympic Brilliance [1982] 2 Lloyds Rep 205. See also Lindus v Melrose (1858) 3 H & N 177 at 182, 157 ER 434 at 436; Birrell v Dryer (1884) 9 App Cas 345 at 350; Parkinson v Barclays Bank Ltd [1951] 1 KB 368 at 375; St Edmundsbury and Ipswich Diocesan Board of Finance v Clark (No 2) [ 1975] 1 WLR 468 at 477. Even in the interpretation of an exclusion clause, the contra proferentem rule should be employed only when other rules of construction fail. Thus in Darlington Futures (supra) the High Court said the following at ACLC 137; CLR 510:

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``... the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.''

In my view there is no need to resort to the contra proferentem rule in this case. The proper interpretation of the disputed provisions can be established using the ordinary rules and principles of construction.

32. Whilst counsel on both sides agreed that I could have regard to evidence as to the factual matrix when the lease was negotiated and executed, counsel differed as to the extent of the factual matrix evidence that I could properly take into account. It is common ground that I may properly take into account the existence of the tax regimes that I have referred to in Canada, New Zealand and the United Kingdom, and the ``Fightback!'' proposal, but there is disagreement as to whether it would be proper for me to take into account the Asprey Report or the 1985 draft white paper. Dr Croft SC submitted that such material was not within the factual matrix. In my view it will not make any difference whether I have regard to the Asprey Report and similar early material. I will therefore ignore that material, and take into account only the evidence as to the tax regimes in Canada, New Zealand and the United Kingdom, and the ``Fightback!'' proposal.

33. When a court sets out to interpret a provision in a contract, its fundamental task is to determine and give effect to the intention of the parties. The process of construction was well explained by Lord Blackburn in River Wear Commissioners v Adamson (1877) 2 App Cas 743 at 763 in the following passage, which related to the interpretation of a statute, but is equally applicable to the interpretation of any written instrument, including a contract:

``My Lords, it is of great importance that those principles should be ascertained; and I shall therefore state, as precisely as I can, what I understand from the decided cases to be the principles on which the Courts of Law act in construing instruments in writing; and a statute is an instrument in writing. In all cases the object is to see what is the intention expressed by the words used. But, from the imperfection of language, it is impossible to know what that intention is without inquiring further, and seeing what the circumstances were with reference to which the words were used, and what was the object, appearing from those circumstances, which the person using them had in view; for the meaning of words varies according to the circumstances with respect to which they were used.''

34. When the terms of this lease were negotiated in 1994, tax reform at a national level had been under discussion in Australia for some time. The parties were negotiating the terms of a 25-year lease with two 10-year options. It was foreseeable that at least once during the forthcoming 45 years, a new tax might be introduced which would have the effect of increasing the supermarket's turnover or gross receipts (inclusive of taxes collected from customers) without increasing or correspondingly increasing its proprietor's profits. No doubt for commercial reasons, it was proposed that the rent of the premises would, after the first two years, include a component calculated by reference to sales. It would have been prudent for any proposed lessee in those circumstances to seek protection from the consequences of the introduction of any new tax which might increase turnover or gross receipts without increasing or correspondingly increasing its profits. It would have been reasonable for any proposed lessor in those circumstances to agree to the lease being worded accordingly.

35. In my view there is no logical reason why the parties would have wanted to discriminate between taxes like the Canadian GST, which is paid by the consumer but collected by the seller, and taxes like the New Zealand GST, which is paid by the supplier out of the gross price. The fact that one sort of tax is imposed on the consumer but the other on the supplier was unlikely to be of significance in relation to the profitability of the lessee's business. The extent of its profitability depends on its turnover, net of either such species of tax. I accept that it would not be reasonable for the lessee's rent to be increased in consequence of the lessee collecting tax payable by its customers, which it was obliged to remit to the Commissioner of Taxation. However, it would be equally unreasonable for the lessee's rent to

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be increased in consequence of the introduction of a tax which in any other manner resulted in an increase in prices without a corresponding increase in profits.

36. I think it must follow that the parties intended the definition of ``Gross Sales'' to be worded widely, so as to catch any sort of tax that might have the effect of increasing the lessee's turnover or gross receipts without correspondingly increasing its profits. When the parties to a contract set out to draft a clause that will be wide in its scope, the result is sometimes a clause that includes a list of things or concepts with a great deal of overlapping. If one accepts that the parties had the intention that I have attributed to them, there is simply no reason to think that they intended the terms ``value added tax'', ``retail tax'', and ``goods and services tax'' to be mutually exclusive, nor to think that they intended those terms to be restricted in their meaning by the words ``which the Lessee is required to add to the price of goods sold''. I find it very difficult to think of definitions of ``value added tax'' and ``goods and services tax'' that would not overlap. It also follows from the intention that I have attributed to the parties that the words ``or any tax calculated in respect of sales by retailers'' in subcl (xiv) should not be interpreted as relating only to taxes that apply only to sales by retailers.

37. In my view GST is a ``value added tax'' within the meaning of the definition of ``Gross Sales'' because the entitlement of suppliers to input credits results in suppliers directly bearing the tax only in respect of their value adding. I think GST is a ``goods and services tax'' within the meaning of the definition because it applies to both goods and services. I think also that it is, within the meaning of subcl (xiv), a ``tax calculated in respect of sales by retailers payable in respect of the gross sales to [a] Federal... authority''. In these respects, I think the definition of ``Gross Sales'' is unambiguous.

38. It is true that an interpretation favourable to the defendants will result in the defendants and any future assignee of the lease paying a rent lower than would otherwise be payable in consequence of a tax liability imposed upon the supermarket proprietor, rather than its customers. However there is nothing inherently unreasonable or unjust in that result, since the lessee is able to pass the burden of GST on to its customers, and it would be commercially unrealistic to think that it would not do so sooner or later.

39. For these reasons, I reject the plaintiff's assertion that for the purpose of calculating the ``Percentage Rent'' payable under the lease, the ``Gross Sales'' are the actual sale prices of the goods sold by the defendants, without any reduction for their liability to pay GST in respect of those sales. The Master's order requires a determination as to the proper construction of the term ``Gross Sales''. Although par13 of the amended statement of claim did not plead the plaintiff's fallback argument - that any deduction in respect of GST was to make allowance for input credits and the abolition of sales tax - I think it is appropriate for me to make a determination in respect of that argument, since it falls within the scope of the Master's order, and since counsel made thorough submissions in relation to that argument.

40. The definition of ``Gross Sales'' requires value added tax or goods and services tax to be excluded when calculating ``the amount of the actual sales price... of merchandise and services sold and provided by the Lessee''. By virtue of the GST Act, ss 9-70 and 9-75(1), the GST for which the lessee is liable is equal to one eleventh of the actual sale price of all taxable supplies. Although input credits are required to be set off against the tax payable by every entity for the purpose of calculating a balance payable or refundable in respect of each tax period, input credits are not relevant to the quantification of the tax, but of the balance payable. Further, the very nature of the GST, as a species of value added tax, is that the burden of all GST payable by the members of a chain of suppliers is passed on to the ultimate consumer. Further, the interpretation suggested in the plaintiff's fallback argument would not accord with the intention that I have attributed to the parties. If, as the result of GST being introduced, the price of an item increased by 10 per cent without any consequent increase in the profit margin of the lessee, it would be unreasonable for the lessee's rent to be increased as a result of the lessee receiving an input credit in respect of that item.

41. I acknowledge that the abolition of sales tax could have an anomalous result. The ``Gross Sales'' for the base year - the second year of the lease - may well have included a small sales tax component, whereas the gross

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sales following the abolition of sales tax on 1 July 2000 contain no such component. All other things being equal, the abolition of sales tax would have resulted in the profit component of the lessee's gross sales increasing, without any corresponding increase in rent. However that is a consequence of the parties having expressly included sales tax in ``the actual sale price'' for the purposes of the definition of ``Gross Sales''. There is simply no basis for interpreting subcl (xiv) of that definition in such a way as to negate the effect of the words ``including any sales tax'' in the opening words of the definition.

42. For these reasons, I determine that the proper construction of the term ``Gross Sales'' in the lease to which this action relates is one whereby, in respect of each taxable supply to which the A New Tax System (Goods and Services Tax) Act 1999 (Cth) applies, GST equal to one eleventh of the price is excluded.


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