High Court affirms traditional test for enforcing oral contracts based on acts of part performance

The High Court has resisted an invitation to expand the grounds on which a party can enforce an oral contract for the sale of the land on the ground of part performance.

Legislation in each State and Territory requires that contracts for the sale of land meet certain formal requirements if they are to be enforceable. The legislation is the modern iteration of s 4 of the Statute of Frauds 1677. In Victoria, s 126(1) of the Instruments Act 1958 says:

“An action must not be brought to charge a person upon a special promise to answer for the debt, default or miscarriage of another person or upon a contract for the sale or other disposition of an interest in land unless the agreement on which the action is brought, or a memorandum or note of the agreement, is in writing signed by the person to be charged or by a person lawfully authorised in writing by that person to sign such an agreement, memorandum or note.

The Statute of Frauds can be avoided where the party seeking to enforce the contract has undertaken acts of part performance. Australian courts have ordered specific performance of oral contracts for the sale of land of land where there have been acts of part performance that are, in words of the Earle of Selbourne LC, “unequivocally, and in their own nature, referrable to some such agreement as that alleged”[1].

In Leon Pipikos v Trayans [2018] HCA 39, which considered the South Australian equivalent of s 126, the appellant submitted that test referred to above was unduly demanding of a party seeking specific performance of an oral contract for the sale of land and urged the adoption of a more relaxed approach. The appellant argued that a court should ask whether a contracting party has knowingly been induced or allowed by the counterparty to alter his or her position on the faith of the contract. The court unanimously rejected the appellant’s arguments.

The court held that the reference to “some such agreement” in the above quote suggested that the requirement was not concerned with the particular contract in question, but with dealings between the parties which in their nature established that the parties were in the midst of an uncompleted contract for the sale or other disposition of an interest in land. The equity to have the transaction completed arises where the acts that are proved are consistent only with partial performance of a transaction of the same nature as that which the plaintiff seeks to have completed by specific performance.

The acts of part performance should be sufficient to indicate a change in the respective positions of the parties in relation to the land that is the subject of the oral contract. The mere payment of money is unlikely to amount to part performance because such payment could also be consistent with a loan, whereas a defendant putting a plaintiff into possession of land is likely to be a sufficient act of part performance.

Acts of part performance must be acts by the party seeking to enforce the contract; it is not necessary for a plaintiff to prove detrimental reliance on its part to establish an equity to relief.

Once there are sufficient acts of part performance, regard may be had to the terms of the oral contract in order to ascertain the appropriate orders by way of specific performance.

In summary, it is necessary first to determine whether the acts performed establish the equity and then to refer to the terms of the oral agreement in order to ascertain the terms in which the equity is to be enforced.

[1]In Maddison v Alderson (1883) 8 App Cas 467 the Earle of Selbourne LC said at 479 that “the acts relied upon as part performance must be unequivocally, and in their own nature, referrable to some such agreement as that alleged”.

 

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When does a deposit become a penalty?

Deposits hold a special place in contracts for the sale of land and do not fall within the general rules about penalties. Where a purchaser defaults the deposit (customarily 10 per cent) can be forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract[1]. The vendor can forfeit the deposit as a minimum sum even if it makes a profit on the resale. On the purchaser’s breach, a vendor is also not limited to recovering the amount of the deposit; but may recover any deficiency on resale (after taking into account the forfeited deposit).

The special treatment afforded to deposits “derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money…”[2].

Where the principles governing deposits and the law governing penalties interact is where the contract provides, for example, for a deposit of less than 10 per cent to be paid and, in the event of a default, for the whole of the 10 per cent deposit to be paid. In such cases the requirement to pay the additional amount on default has been held to be a penalty[3].

In Simcevski v Dixon (No 2) [2017] VSC 531 Riordan J considered a contract for the sale of land that provided for the payment of a deposit equivalent to 5 per cent of the purchase price. Upon default by the purchaser, the vendor sought payment of a further 5 per cent of the purchase price relying on clause 28.4 of the contract which provided that:

‘If the contract ends by a default notice given by the vendor:

(a) the deposit up to 10% of the price is forfeited as the vendor’s absolute property, whether the deposit has been paid or not; and”

While His Honour accepted that the anomalous position of deposits in the law of penalties protected them in most circumstances, he held that the obligation in cl 28.4 to pay further sum of 5% of the price was void as a penalty because:

• the obligation to pay a further sum of 5% of the purchase price did not purport to be by way of a deposit because the words in cl 28.4, being ‘the deposit up to’, had been deleted; and
• the further sum of 5% was only payable ‘[i]f the contract ends by a default notice given by the vendor’.

His Honour said:

“In my opinion, the circumstances of this case lead to the position, described by the Court of Appeal, in Melbourne Linh Son Buddhist Society Inc v Gippsreal Ltd[4], as:

[t]he irresistible inference that arises from [the] evidence and the inherent circumstances of the … transaction is that the [payment is to be made] in order to punish the [breaching party] for the inconvenience its conduct caused to the [innocent party] … rather than to protect any legitimate commercial interest of the [innocent party] arising from a breach … by the [breaching party].

His Honour also held that cl 28.4 was not a penalty simply because it was not a liquidated damages clause (ie a clause that refers to a sum fixed by the contract as a genuine pre-estimate of damage in the event of breach), but rather because it imposed an obligation to pay without any limit on the vendor’s right to claim damages to the extent that they exceed that payment.

Drafters of contracts must make it clear what is and what is not a deposit and provide for that sum to be paid without any reference to a breach. The case contains an extensive discussion of all the relevant caselaw.

[1] See: Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573; Kazacos v Shuangling International Development Pty Ltd (2016) 18 BPR 36,353.

[2] Workers Trust, 578-9.

[3] See, among others: Luu v Sovereign Developments Pty Ltd (2006) 12 BPR 23,629; Iannello v Sharpe (2007) 69 NSWLR 452.

[4] [2017] VSCA 161.

Second Notice to Complete Revives Terminated Agreement – Contract Sale of Land

A vendor who has terminated a contract for the sale of land should be wary of serving a second notice to complete because the second notice revives the agreement that has been terminated.

In Rona v Shimden [2005] NSWSC 818 a vendor under a contract of sale claiming to have terminated the contract, gave notice to complete which was expressed to be without prejudice to its contention that the contract was terminated. White J at [86] analysed the position as follows:

The giving of a notice to complete may give rise to an estoppel which precludes the party giving the notice from asserting that the contract has been terminated. Here, the purchaser did not do anything consequent upon the service of the notice which could create such an estoppel. Estoppel aside, the service of a notice to complete without prejudice to a prior notice of termination takes effect as an offer to revive the agreement, capable of being accepted by performance in accordance with the terms of the notice to complete: Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 9177 at 9184, 9187.

In Naval and Military Club v Southraw [2008] VSC 593 Byrne J accepted this analysis. See: also Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd & Ors [2014] VSC 57.