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.

Real estate agent not authorised to accept termination notice given under s.31 of Sale of Land Act 1962

A purchaser of land in Victoria may terminate the contract “at any time before the expiration of three clear business days” after signing the contract. See: s.31(2) of the Sale of Land Act 1962 (Vic). The termination notice must be “given to the vendor or his agent” or left at an address specified in the contract. See: s.31(3). Termination entitles the purchaser to the return of most of the moneys paid under the contract. See: s.31(4).

In Eng Kiat Tan and Cheng Lo v Thomas Russell [2016] VSC 93 the Supreme Court of Victoria had to decide whether the vendor’s real estate agent was an “agent” for the purpose of being given a termination notice.

The High Court has said that the employment of a real estate agent to find a buyer of property does not necessarily create any authority to do anything which will affect the legal position of the employer; an agent does not even have implied authority to receive the purchaser money. See: Peterson v Maloney (1951) 84 CLR 91. In Brien v Dwyer (1978) 141 CLR 378 Gibbs J said that the expression “agent”, when used in relation to a real estate agent, was misleading because “Such so-called agents do not have a general authority to act on behalf of a vendor in relation to a contract.”

In Eng Kiat Tan the purchasers gave the termination notice to the real estate before the expiration of three clear business days after signing the contract. The vendor refused to accept that the contract had been terminated pursuant to the Act. The sale price was $4,480,000. The vendor resold the land to another purchaser for $4,070,000. The purchasers commenced a proceeding seeking recovery of the deposit and the vendor counterclaimed seeking the balance of the deposit and the loss suffered on the resale of the property. The purchasers claim failed and the vendor’s claim succeeded.

The purchaser argued that s.31 was remedial legislation and that the expression “agent”in s.31 must extend to the vendor’s real estate because, among other things, the purchaser had only three days to make inquiries as whether a person was or was not an “agent” with authority to accept the termination notice. The purchaser also referred to Lloyd and Rimmer’s Sale of Land Act Victoria where the authors say that for the purpose of s.31 “agent” includes but is not limited to the estate agent engaged by the vendor in connection with the sale.

The vendor argued that s 31 did not create a statutory authority to receive a termination notice: the purchaser had to establish that the vendor’s real estate had actual or ostensible authority to accept the termination notice and there were no facts which established any authority in the vendor’s real estate agent beyond that usually granted to real estate agent.

The trial judge held that s.31 did not create a statutory authority in a real estate agent to accept a termination notice.

Purchasers need to ensure that the sale contract identifies the person or persons upon whom a termination notice under s. 31 can be given or the place where a notice can be left.

Vendor not entitled to interest on unpaid contract price where contract terminated

Vendors who terminate contracts for the sale of land on the ground of a default by the purchaser often claim interest on moneys that have not been paid calculated from the date of the breach to the date of termination. Clause 25 of the general conditions of the standard form of contract concerning the sale of land prescribed by the Estate Agents (Contracts) Regulations 2008 (Vic)  provides that:

“A party who breaches this contract must pay to the other party on demand:

…… ; and

(b)       any interest due under this contract as a result of the breach.”

Does clause 25(b) entitle a vendor to interest on the contract price from the date of a breach by a purchaser to the date the vendor terminates the contract?

Two cases in the Supreme Court of Victoria suggest that the answer to this question is “yes”. In Portbury Development Co Pty Ltd v Mackali [2011] VSC 69 the plaintiff sold a property for $1,600,000 with a deposit of $60,000, with the balance of purchase price payable on a nominated date. The defendant failed to complete and the plaintiff terminated the contract. The court accepted that the plaintiff’s termination was valid. The plaintiff’s claim included damages being, among other things, the difference between the contract price and the value of the property at the time of termination and “interest between default and rescission” based on a clause similar to clause 25. The court awarded the amount of interest claimed to the plaintiff, noting that such interest was under the terms of the condition payable on demand and remarking at [27]:

“By the notice of rescission the plaintiff made an appropriate demand for that interest. Accordingly, the plaintiff is entitled to judgment against the defendant for the sum of interest claimed by it.”

In Pettiona v Whitbourne [2013] VSC 205  the facts were similar to those in Portbury. The price of the property was $5,850,000. The purchaser failed to pay the balance of purchase price on the date nominated for settlement. A notice of default was served and the contract was terminated. The plaintiff claimed, amongst other things, interest on the unpaid balance for the period of default. The claim for interest, which was made under the terms of the contract, was not disputed by the defendant.

A recent case in the County Court of Victoria suggests that the answer to the question posed is “no”. In Yvonne Maria Van Der Peet Bill v Allan James Clarke [2015] VCC 1721 Judge Macnamara declined to follow Portbury and Pettiona in deciding that a vendor of land was not entitled to interest from the date of the breach to the date of the termination of the contract. At [77] His Honour analysed the issue as follows:

“To put it in a nutshell, how can interest be awarded upon an alleged principal sum that ultimately was never payable?”

In answering that question His Honour said it was necessary to go to “some fundamental principles of the law of vendor and purchaser” and “one of Sir Owen Dixon’s most celebrated judgments” in McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 477-479. In McDonald the guarantors of a purchaser’s obligations under a terms contract contended that upon termination by the vendor the contract was cancelled as to the future and, because there would be no transfer of the property, the purchaser’s obligation to pay an outstanding instalment of the purchaser price came to an end. The High Court accepted the guarantors’ contention. Because the guarantors’ obligation was a secondary one their obligation was also terminated.

His Honour also considered the decision of the New South Wales Court of Appeal in Carpenter v McGrath (1996) 40 NSWLR 39 which he said accorded with the general principles that emerged from McDonald. In Carpenter the purchaser failed to complete a contract to buy land and the trial judge awarded damages to the vendor which included a claim for interest from default until termination. On appeal the Court of Appeal disallowed the claim for interest from default until termination. The Court’s reasoning was in effect that once the contract ended the vendor could not have sued for the purchase price and was relegated to a claim for the loss of the bargain. The interest operated to increase the amount payable on completion and because the purchase moneys were not payable interest could not be claimed.

Judge Macnamara said that while Portbury and Pettiona supported the award of interest, general principle flowing from the analysis in McDonald pointed away from an award being made and therefore the claim for interest failed.

A question that is unresolved is whether the position might have been different if the vendor had re-sold the land rather than retaining it because the vendor would, in determining the loss on any resale, arguably have been entitled to treat the purchase price as constituted both by the contract price and the interest payable under the contract.

 

Wife’s title as joint proprietor with husband not defeasible by reason of husband’s fraud

In Cassegrain v Gerard [2015] HCA 2 the High Court of Australian had to decide whether a wife’s title as a joint proprietor with her husband was defeasible by reason of the husband’s fraud. The case contains an interesting discussion about when the fraudulent acts of an agent can be attributed to the principal and also the nature of a joint tenancy.

Section 42(1) of the Real Property Act 1900 (NSW) provides that the estate of a registered proprietor is paramount. It provides that, subject to some exceptions:

“Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded“. (emphasis added)

Section 118(1) provides that:

“Proceedings for the possession or recovery of land do not lie against the registered proprietor of the land, except as follows:

…

(d)       proceedings brought by a person deprived of land by fraud against:

(i)        a person who has been registered as proprietor of the land though fraud; or

(ii)       a person deriving (otherwise as a transferee bona fide for valuable consideration) from or through a person registered as proprietor of the land through fraud.”

The vendor transferred the land to the husband and wife as joint tenants for consideration to be satisfied by debiting the husband’s loan account with the vendor. The husband knew that the vendor did not owe him the amount recorded in the loan account. The husband then transferred his interest in the land to his wife for a nominal consideration. The questions were whether the wife’s title, first as joint proprietor with her husband, or second deriving from or through her husband under the subsequent transfer, was defeasible by the vendor.

Much attention was given in argument to whether the husband was the wife’s “agent”. In Assets Company Ltd v Mere Roihi [1905] AC 176 at 210 Lord Lindley that:

“the fraud which must be proved in order to invalidate the title of a registered purchaser for value … must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents.” (emphasis added)

The argument was about whether the fraud was “brought home” to the wife because the husband was fraudulent and was her “agent”. It was not disputed that the husband acted fraudulently in both the first and second transfers.

The court rejected the contention that the husband’s fraud could be sheeted home to the wife as a matter of agency. The court referred to the statement by Street J in Schultz v Corwill Properties Pty Ltd 1969] 2 NSWR 576 where his Honour said :

“It is not enough simply to have a principal, a man who is acting as his agent, and knowledge in that man of the presence of a fraud. There must be the additional circumstance that the agent’s knowledge of the fraud is to be imputed to his principal. This approach is necessary in order to give full recognition to (a) the requirement that there must be a real, as distinct from a hypothetical or constructive, involvement by the person whose title is impeached, in the fraud, and (b) the extension allowed by the Privy Council that the exception of fraud under s 42 can be made out if ‘knowledge of it is brought home to him or his agents’.”

There was no evidence that the wife was knowingly engaged in the husband’s scheme to deprive the vendor its land for nothing.

The majority (French CJ, Hayne, Bell and Gaegler JJ) held that the wife’s title as joint tenant was not defeasible by showing that the husband had acted fraudulently because the fraud had not been brought home to her.

Keane J dissented on this issue. His Honour decided that the land was acquired by the wife and the husband as joint tenants and as joint tenants they acquired a single estate. The title was acquired by fraud “sheeted home” to the wife, not because the wife claimed the title through her husband, but by virtue of the joint tenancy of the single estate to which they were entitled.

The vendor succeeded in recovering the land because the whole court  decided that s.118(1)(d)(ii) applied: the wife had acquired an interest as tenant in common as to half from the husband who had been registered as proprietor through fraud.

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.

 

What is the effect of a nominee clause?

There is a translation key (widget) on the mirrored blog for ease of reading for non-English speaking members of the public or professionals. The mirrored blog can be found at  http://roberthaybarrister.blogspot.com.au/

 

What is the effect of a purchaser of land nominating a nominee under a nomination clause contained in the contract: what rights and obligations does the nominee have?

The answer is none: the nominee has no contractual rights and no obligations.

In 428 Little Bourke Street Pty Ltd v Lonsdale Street Cafe Pty Ltd [2009] VSC 133 the vendor misrepresented the lettable area of the property. The purchaser nominated the plaintiff as purchaser. The director of the purchaser was also the director of the nominee. It was alleged that the nominee purchaser relied on the representations. The nominee clause  provided as follows:

“If the contract says that the property is sold to a named purchaser ‘and/or nominee’ (or similar words) the named purchaser may, at least 14 days before settlement date, nominate a substitute or additional purchaser, but the named purchaser remains personally liable for the due performance of all the purchaser’s obligations under this contract.”

The contract authorised a substitute or additional purchaser.

The nominee purchaser brought an action for damages based on a breach of s 52 of the Trade Practices Act, s 9 of the Fair Trading Act and for negligent misstatement.

Judd J held that that the nomination did not have the effect of a novation and the plaintiff did not become a party to the contract of sale.

His Honour also found that by the time the plaintiff paid the purchase price and took the conveyance it was aware of the true lettable area of the property.

Thus, the cause of the plaintiff’s loss was either an informed choice to pay a price for the property and take the conveyance or, if the payment was involuntary, it was because the plaintiff was caused by its directors, in full knowledge of the true facts to make the payment in which case but for the nomination it would not have suffered any loss.  The loss was caused by the nomination – not the representations.  Judd J dismissed the proceeding.

 

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